Board Composition and Corporate Profitability; Evidence From Sarbanes-Oxley

Abstract

This paper uses Sarbanes-Oxley as an instrument in conjunction with regression discontinuity analysis to explain the relationship between the composition of a board of directors and corporate profitability. Instead of performing the instrumental variable regression, the first stage and reduced form equations are presented separately, and the Wald estimator is used to explain how board composition changes since Sarbanes-Oxley affected corporate profitability. My analysis implies a positive relationship between board size and profitability, a negative relationship between CEO-chairman of the board duality and profitability, a negative relationship between directors’ participation on other major boards and profitability, and inconclusive relationships between measures of gender diversity and board independence and company profitability. The paper concludes that the validity of these results is contingent upon Sarbanes-Oxley explaining changes in corporate profitability solely through changes in board composition.