3. Research design
3.1 Hypothesis development
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3. Research design
3.1 Hypothesis development
This study attempts to test the relationship between conference calls and board interlocks and further examines whether the interlocking ties affect the likelihood of holding conference calls.
Board interlock ties serve as a network that facilitates the dissemination of corporate practices. For decision makers, interlocking network is a familiar information resource so that they trust the spread information and further mimic other firms’ practices (Galaskiewicz and Wasserman, 1989; Haunschild, 1993). Firm strategies and structures are thus influenced though the communication of these interlocking directors. Prior studies argue that board interlocking is associated with the spread of poison pill and golden parachute during the take-over wave in U.S in 1980s (Davis, 1991; Davis and Greve, 1997), option grants backdating (Bizjak et al., 2009), synchronous returns (Khanna and Thomas, 2009), private equity offers (Stuart and Yim, 2010), tax shelter (Brown, 2011), earning contagious (Chiu et al., 2010), and selection of auditors (Davison et al., 1984; Chin and Chan, 2012; Yang et al., 2012).
Conference call is a voluntary disclosure medium for companies to communicate firm-specific information to the public effectively and increase the information content in the market (Tasker, 1998; Frankel et al., 1999). By increasing the information content in the capital market, the information asymmetry between managers and investors are thus mitigated through conference calls (e.g., Tasker, 1998;
Bowen et al., 2002; Brown et al., 2004; Kimbrough, 2005). Reducing the information asymmetry between firms and investors lead to economic consequences such as decreases in analysts’ forecast error (Bowen et al., 2002), increases in the
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liquidity of shares (Diamond and Verrecchia, 1991), lowering costs of capital (Brown et al., 2004), and higher merger announcement returns (Kimbrough et al., 2011). For listed companies, increasing the liquidity of shares and lowering the cost of capital are two major consequences that increase managers’ incentives to voluntarily disclose information (Diamond and Verrecchia, 1991; Healy and Palepu, 1993; Frankel et al., 1995; Healy and Palepu, 2000).
Voluntary disclosure policies regarding conference calls can be transferred from firm to firm. To be more specific, a firm’s disclosure policy of holding conference calls can be spread through the interlocking director network among firms. Director interlock serves as a reliable information source that may influence the corporate strategies. In the perspective of interorganization connection, corporate behavior can be learned by observing other firms through board interlocking. When the focal firm has directors sit on other boards, these directors have better chances to observe other firms’ decision making processes of holding conference calls and to better understand the potential benefits of this voluntary disclosure mechanism. Thus, directors who sit on other boards that hold conference calls are very likely to facilitate the decision to hold conference calls in the focal firms. In other words, the benefits and importance of conference calls would be transferred from firm to firm through these interlocking directors. Therefore, I hypothesize that firms connected to other firms that hold conference calls are more likely to hold conference calls.
Hypothesis 1: Firms with interlocked directors connected to other call firms are more likely to hold conference calls
Information asymmetry between managers and investors create agency problems that arise from the separation of management and ownership. According to the theory of corporate governance and agency problems, independent board of directors
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and better disclosure mechanism could alleviate information asymmetry. Board of directors monitor and give advices to the operation of the firm. Particularly, independent directors are directors with professional knowledge and thus, are considered to be more willing to protect shareholders’ interests. Ajinkya et al. (2005) argue that independent directors not only monitor the quality of financial information but also play a role in determining and monitoring a firm’s voluntary disclosure policy.
They find that firms with more outside directors are more likely to issue a forecast and are inclined to forecast more frequently, suggesting that director independence are positively associated with voluntary disclosure. By using the data in Hong Kong, Ho and Wang (2001) indicate that audit committee, which is organized by all independent directors in a firm, is positively related to voluntary disclosure. Cheng and Courtenay (2006) provide evident that firms with a higher proportion of independent directors on the board are associated with higher levels of voluntary disclosures. Consistent with this finding, Donnelly and Mulcahy (2008) posit that firms that have more independent directors or nonexecutive directors make greater voluntary disclosure than other firms. These studies support the idea that independent directors alleviate information asymmetry by increasing the level of voluntary disclosure.
Since independent directors increase firms’ voluntary disclosure and conference calls is an important voluntary disclosure medium that helps reduce information asymmetry between management and outside investors, an interesting question is addressed: When independent directors sit on board of other call firms, will they spread the information about the benefits of holding conference calls and facilitate the decision to hold conference calls in the focal firm? Chiu et al. (2010) argue that
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board interlocks with different board positions15 have different influences over financial statements. Following their argument and prior studies on the relationship between independent directors and voluntary disclosure, I hypothesize that when the focal firm has independent directors sit on the boards of other firms that hold conference calls, it is more likely to hold conference calls.
Hypothesis 2: Firms linked to other call firms through interlocked independent directors are more likely to hold conference calls.