How Independent Boards Attract Foreign Capital
Foreign investors gravitate to firms with independent boards, most of all where legal institutions are weak.
Investors everywhere put too little of their money in foreign stocks, a long-standing puzzle known as equity home bias. Part of the reluctance is trust: it is hard to invest across borders when you cannot be sure anyone is watching management. This research asks whether a firm's own governance can supply that assurance.
The answer is yes. After accounting for the possibility that governance and ownership drive each other, the study finds that foreign investors, both from the U.S. and elsewhere, show a strong preference for firms with more independent corporate boards.
The effect is not uniform. The pull of board independence is significantly stronger in countries with less developed legal institutions and weaker protection of investor rights. Where the law protects investors poorly, the firm's own board has to do the work, and firms that build independent boards are rewarded with foreign capital. Institutional investors respond most strongly of all.
The paper, which received the Eastern Finance Association's award for best paper in international finance, carries a practical message for firms in emerging markets: governance is not just compliance. It is a tool for reaching capital that would otherwise stay home.
The Takeaway
Independent boards attract foreign capital, and they matter most exactly where country-level investor protections are weakest.