The effect of nominating committee attributes and use of recruiting consultants on information risk
thesisposted on 08.02.2017 by Wong-Lim, Christina Shuet Wai
In order to distinguish essays and pre-prints from academic theses, we have a separate category. These are often much longer text based documents than a paper.
Drawing from the overarching framework of the agency theory, corporate governance and information risk, this thesis examines the association between nominating committee existence and information risk as proxied by firm’s implied cost of equity capital. Given the theoretical framework of resource dependency and the emerging board capital literature, this thesis builds on these foundations to investigate the implications of nominating committee expertise and social capital attributes in the context of information risk. This thesis also examines the collaboration of nominating committee attributes in the context of the team effectiveness literature. As the engagement of recruiting consultants may be perceived by investors to be detrimental to effective monitoring, this thesis further investigates the association between nominating committee’s use of outside recruiting consultant and firm’s implied cost of equity capital. Using data from listed U.S. firms in the sample period 2004 to 2009, the evidence indicates that firms that have established nominating committee experience lower cost of equity capital. This is consistent with the view that the presence of nominating committee curbs CEO’s entrenchment of elected directors; thus signals monitoring credibility and lower information asymmetry. Results suggest that nominating committees with finance/ accounting expertise and top management expertise are associated with lower cost of equity capital. This is consistent with the notion that such expertise are determinants of monitoring effectiveness in recruiting qualified monitors which signals lower information risk. However, I do not find evidence of associations between business/operational and human resource management expertises with cost of equity capital. The evidence also indicates that investors perceive nominating committee social capital attribute to be detrimental to monitoring effectiveness resulting in a positive association with cost of equity capital. Further analysis reveals that the negative perception of social capital attribute is driven by nominating committee network linkage to financial institutions; as no association is observed between educational institutions network linkage and other business entities network linkage with the cost of equity capital. The examination of the collaborations of attributes interestingly reveals that the collaboration of attributes can create either positive (negative) synergistic effect to enhance (diminish) nominating committee effectiveness; demonstrating the complex dynamics of how different attributes work (not work) together. Additionally, results suggest that investors perceive nominating committee’s use of outside recruiting consultants impairs the director recruitment process resulting in higher cost of equity capital. Fundamentally, this thesis provides insight into the way the expertise and social capital attributes affect the agency and resource dependency roles of nominating committee with respect to information risk. This thesis contributes to the growing strand of board capital literature by taking up the challenge to identify nominating committee relevant expertise and social capital attributes for empirical examinations. Further, this thesis contributes to the current debate on corporate board’s engagement of consultants. Overall this thesis is relevant for regulators and firms as it provides valuable insights as to the importance to consider the individual and combinative effects of nominating committee attributes on monitoring effectiveness and to assess the independence issues when engaging recruiting consultants.