The Investment Opportunity Set and the Voluntary Use of Outside Directors: New Zealand Evidence

Posted: 28 Oct 2000

See all articles by Mahmud Hossain

Mahmud Hossain

Nanyang Technological University (NTU) - Division of Accounting

Steven F. Cahan

University of Auckland Business School

Michael B. Adams

University of Wales - Swansea - European Business Management School

Abstract

This study examines whether the composition of boards of directors differs between high and low growth firms. Based on prior research, we hypothesise that firms with greater investment opportunities require more monitoring because managers in these firms have more discretion both in selecting investments and allocating resources between investments. Because outside directors can be more effective monitors than inside directors, we predict that outsiders will make-up a larger proportion of the board in high growth firms than in low growth firms. Using a cross-sectional sample of 77 New Zealand firms, our results suggest that the percentage of outside directors is related to growth for two of the three measures of investment opportunities which we employ. As expected, the percentage of outside directors is also related to a composite measure of investment opportunities.

JEL Classification: D23, G32, M41

Suggested Citation

Hossain, Mahmud and Cahan, Steven F. and Adams, Michael B., The Investment Opportunity Set and the Voluntary Use of Outside Directors: New Zealand Evidence. Available at SSRN: https://ssrn.com/abstract=242783

Mahmud Hossain

Nanyang Technological University (NTU) - Division of Accounting ( email )

Nanyang Business School
Singapore, 639798
SINGAPORE
+ 65 792 4217 (Fax)

Steven F. Cahan (Contact Author)

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

Michael B. Adams

University of Wales - Swansea - European Business Management School ( email )

Singleton Park
Swansea, Wales SA2 8PP
United Kingdom

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