Birds of an ethnic feather: The impact of CEO-board cultural similarity on firm value and board effectiveness

Zainal Osman Shah, Shazerinna 2021. Birds of an ethnic feather: The impact of CEO-board cultural similarity on firm value and board effectiveness. PhD Thesis, Cardiff University. Item availability restricted.

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Abstract

The thesis contributes to our understanding of the impact of CEO-board cultural similarity on firm valuation and the effectiveness of the board of directors in the Malaysian setting, where there are three clearly defined and dominant ethnic groups and thus distinctive cultural values. While prior studies have long emphasised the effect of social ties on governance outcomes, we know little about the effect of cultural ties between CEO and directors. Drawing from homophily and social identity theory, we hypothesise that similarity in cultural values may serve as an important conduit through which social connections and relationships are developed. This thesis postulates that cultural similarity can be an indicator of the existence of similar values and beliefs between CEO and directors, which can potentially be either detrimental or beneficial. Accordingly, this thesis investigates whether this new type of manager-director ties, resulting from cultural similarity, affects firm valuation and board monitoring effectiveness. Using a large sample of publicly listed Malaysian firms over 2009-2016, we find that similarity in ethnic identities between the CEO and board of directors is detrimental to firm value. We also find a positive relationship between our proposed measure of board independence and firm value. These results suggest that cultural ties are value-relevant and act as a medium of CEO-board relationship, which consequently may impair the effectiveness of board independence. The cultural similarity is also shown to be associated with fewer board meetings and to be more detrimental when it applies to independent directors compared to executive directors. Our evidence suggests that cultural similarity impairs the monitoring function of a board and thus reduces shareholder value. We also provide the potential causes of the negative valuation impact of CEO-board cultural similarity. Our findings highlight that the cultural similarity could also lead to weak board monitoring effectiveness and internal control over financial reporting as measured by earnings management practice. We also provide evidence that cultural similarity is associated with managerial entrenchment as reflected in the reduced involuntary CEO turnover. Overall, our evidence suggests that CEO-board cultural similarity reduces firm value and dampens the board’s independence and monitoring effectiveness. This thesis makes significant contributions to the nascent literature on corporate governance and has important implications for various stakeholders including shareholders, policymakers, and regulators.

Item Type:	Thesis (PhD)
Date Type:	Completion
Status:	Unpublished
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > H Social Sciences (General)
Uncontrolled Keywords:	CEO-Board relationship; Board monitoring, Culture, Ethnicity, Firm Value, Earnings Management, CEO turnover, Corporate Governance, Social Identity Theory, Homophily Theory
Date of First Compliant Deposit:	18 October 2021
Last Modified:	06 May 2023 02:27
URI:	https://orca.cardiff.ac.uk/id/eprint/144879

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