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立 政 治 大 學
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1. Introduction
This study examines the relation between conference calls and board interlocks.
Board interlock is a communication channel that is formed when one board of director sits on multiple boards simultaneously and transfers the information from one board to another. These interlocking boards create the connections between firms and these connections form a network that transfers reliable information (Galaskiewicz and Wasserman, 1989). Social network theory suggests that a firm’s decisions or behaviors are influenced by information spread through social network (Haunschild, 1993). The purpose of this study is to investigate that whether board interlock network affects a firm’s disclosure policy related to conference calls.
Prior studies identify the spread of financial strategies through board interlock.
Davis (1991) and Davis and Greve (1997) show that the spread of poison pill and golden parachute during the take-over wave in U.S in 1980s are associated with board interlock. Bizjak et al. (2009) indicate that option grants backdating is associated with board interlocks. Khanna and Thomas (2009) show that firms that have interlocking directorates are particularly likely to have synchronous returns. In the field of accounting, Brown (2011) finds that board interlocked ties increase the likelihood that firms adopt tax shelter. Davison et al. (1984) and Chin and Chan 2012) provide evidence that board interlocking directors affect the choice of auditors.
Based on these researches, I focus on the likelihood of holding conference calls among listed companies in Taiwan through the interlocking board networks.
Information asymmetry between the management and outside investors is a long-concerned agency problem and leads to higher cost of capital. Voluntary disclosure is one mechanism established to mitigate information asymmetry.
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Specifically, for firms that rely heavily on external financing, reducing cost of capital is the major incentive to disclose corporate information voluntarily (Verrecchia, 1983;
Donnelly and Mulcahy, 2008).
Conference call in Taiwan has become a widely used voluntary disclosure in the last two decades. Taiwan has a special industrial environment in that high-tech industry (or the electronic industry in my sample) is the most important industry in the development of economy. The high level of innovation activities in these high-tech companies are not reflected on their financial statement as the values of innovative activities are difficult to be verified and assessed under current accounting principles.
This exacerbates the information asymmetry between managers and investors and makes firms’ external financing more difficult. To better communicate the firm value to investors and reduce information asymmetry and cost of capital, Taiwanese managers have incentives to voluntarily disclose information through conference calls (Chin et al., 2007).
The interactive characteristic of conference call leads to more effective communication than other types of voluntary disclosure. Many studies find that conference call helps mitigate the information asymmetry between inside managers and outside investors by increasing firm-specific information available to the market (Tasker, 1998; Bowen et al., 2002; Brown et al., 2004; Kimbrough, 2005). Investors are more confident to invest firms when corporate information is easier to obtain, which in turn would reduce costs of capital (Diamond and Verrecchia, 1991; Healy and Palepu, 2000; Francis et al., 2008).
This study concentrates on the argument that information about disclosure policies on conference calls are transferred through board interlocks. As board interlock serve as a reliable, valuable and imitable information resource between firms, a firm’s
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behavior can be affected by observing other firms’ (Galaskiewicz and Wasserman, 1989; Barney, 1991; Haunschild, 1993). Under the growing trend in using conference calls as a voluntary disclosure medium in Taiwan, firms tied to other firms that hold conference calls have chances to observe the information about conference calls and know better about the importance of this voluntary medium. Specifically, these interlocked directors have chances to observer the decision process of holding conference calls in interlocked firms and the expected benefits of reducing information asymmetry between management and outside investors. Thus, I expect a positive association between focal firms’ interlocked ties to other call firms and its decision to hold conference calls. The sample consists of listed firms in Taiwan from 2000 to 2009 and we use Logistic regression and Zero-Inflated regression to test our hypotheses. The results of this study support the argument that the spread of corporate practices are positively associated with board interlock networks.
Specifically, I find that focal firms connected to other call firms through board interlock are more likely to hold conference calls and tend to hold conference calls more frequently. This result is more prounced when the connection is through the focal firms’ independent directors. This evidence implies that interlocked directors with different board positions have different impacts on a firm’s disclosure policy.
In additional analysis, we provide a preliminary analysis on the content of conference calls and finds that interlocked directors may influence the information disclosed in conference calls. Overall, these empirical results suggest that a firms’ disclosure policy regarding the decision to hold conference calls is affected by interlocking ties, particularly among interlocked boards through independent directors.
This study makes several contributions to the corporate disclosure and social network literature. First, this study links the voluntary disclosure and social network,
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國立 政 治 大 學
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N a tio na
l C h engchi U ni ve rs it y
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and in particular, conference calls and board interlocks. Prior researchers have identified a positive association between board interlock and the spread of corporate practices but not disclosure practices. Second, I further distinguish different board positions to examine the effect of independent director interlock on conference calls.
The finding that firms tied to other call firms through independent directors are more likely to hold conference calls implies that independent directors play a better monitoring role in a firm’s disclosure policy over other interlocking directors. Third, in contrast to prior studies on conference calls or board interlock that focus mostly in the US or Europe, I use the data in Taiwan where conference calls and board interlocks are relatively less investigated. The results in Taiwan are consistent with evidences from US or European area. Fourth, the additional analyses shed further insights to the impact of share directors on the type of information disclosed in conference calls.
The remainder of this study is organized as follows. Section 2 describes the related literature and background on conference calls and board interlock. In section 3, I develop hypotheses based on prior research and construct the regression models.
Section 4 reports the descriptive statistical analysis, correlation analysis and empirical results. Section 5 concludes.
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國立 政 治 大 學
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l C h engchi U ni ve rs it y
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