The Role of Corporate Board Structure in Attracting Foreign Investors*

Mihail K. Miletkova, Annette B. Poulsenb, M. Babajide Wintokic

a
Paul College of Business and Economics, University of New Hampshire, Durham, NH 03824,
USA
b
Terry College of Business, University of Georgia, Athens, GA 30602, USA
c
School of Business, University of Kansas, Lawrence, KS 66045, USA

______________________________________________________________________________
Abstract
A long-recognized phenomenon in capital markets is the underinvestment in foreign equity
securities, known as equity home bias. Our study examines the effect of board independence on
the firms ability to attract foreign equity capital. After accounting for potential endogeneity, we
document that U.S. and non-U.S. foreign investors exhibit a strong preference for firms with
more independent corporate boards. Further, our analysis indicates that the positive relation
between board independence and foreign ownership is significantly stronger in countries with
less developed legal institutions and poor external protection of investor rights. We suggest that
it is in these countries that firm-determined characteristics such as independent boards can be
most beneficial in attracting capital. We also find that institutional investors are more responsive
to the impact of independent corporate boards than are other types of investors.

Keywords: Foreign ownership; Board Structure; Board independence; International corporate

governance
______________________________________________________________________________

*
We would like to thank the seminar participants at the University of New Hampshire, the 2014 Annual Meetings of
the Midwestern Finance Association and the Eastern Finance Association for helpful comments on an earlier draft.
M. Babajide Wintoki acknowledges the research support of the Institute of International Business at the University
of Kansas School of Business, and Mihail K. Miletkov acknowledges the financial support of the Graduate School at
the University of New Hampshire.

Electronic copy available at: http://ssrn.com/abstract=2424327

I. Introduction

Equity home bias is generally described as the phenomenon where investors overweight

their portfolios with domestic equity securities relative to that justified by portfolio theory. In

doing so, investors limit their opportunity to improve the risk and return characteristics of their

holdings. The existence and persistence of the equity home bias across both developed and

developing countries has long been noted in the literature (see, e.g., French and Poterba, 1991,

Tesar and Werner, 1995, Cooper, Sercu and Vanpee 2012). While several factors seem to be

related to this bias, including domestic risk considerations, additional costs and barriers to

international transactions and information asymmetries, no consensus on a single source has

been reached (Sercu and Vanpee, 2007).

Several researchers have focused on governance at both the country and firm levels as

important factors in explaining equity home bias. Our work adds to this literature by studying the

role of independent directors on corporate boards on foreign equity holdings of investors. While

previous studies on the role of corporate governance in equity home bias have focused on the

negative impact of the possibility for expropriation of shareholder wealth by insiders,

government or other groups, we consider an action under the control of firms that could attract

foreign capital. We argue that a more independent corporate board reduces the cost of

monitoring by outside investors and we predict that the level of foreign ownership will be higher

in firms with more independent directors. As an extension of this argument, we argue that the

importance of independent directors increases as the average cost of monitoring in a particular

firm or country increases. We also consider whether institutional investors or U.S. investors are

more sensitive to the inclusion of independent directors than other investor groups.

Electronic copy available at: http://ssrn.com/abstract=2424327

 Our research contributes to the literature on the determinants of foreign ownership of

equity. At the country level, prior studies have documented that foreigners are reluctant to invest

in countries with poor disclosure standards and lower levels of investor protection (Aggarwal,

Klapper, and Wysocki 2005; Ferreira and Matos 2008; Leuz, Lins, and Warnock, 2009). At the

firm level, extant research documents that foreign ownership is significantly related to the

issuance of ADRs, the quality of firm disclosure practices, and different measures of ownership

concentration (Aggarwal, Klapper, and Wysocki, 2005; Giannetti and Simonov 2006; Ferreira

and Matos, 2008; Leuz, Lins, and Warnock, 2009; Ammer, Holland, Smith, and Warnock, 2012).

Our research focusing on the role of corporate board structure extends this line of research by

emphasizing the importance of self-determined firm governance.1

Our research also adds to the literature on the relation between corporate board structure

and firm performance. Several cross-country studies have documented a significantly positive

relation between board independence and firm value, especially in countries with poor investor

protection (Dahya, Dimitrov, and McConnell 2008; Aggarwal, Erel, Stulz, and Williamson,

2009; Bruno and Claessens, 2010). These studies suggest that independent board members

increase shareholder value by actively monitoring company insiders and preventing minority

shareholder expropriation. Our findings suggest an indirect channel through which board

independence contributes to firm performance in these poor investor protection countries.

Specifically, higher board independence attracts foreign investors thereby expanding the firms

shareholder base and reducing its cost of capital (Merton, 1987). Additionally, foreign investors

1
It may be argued that, outside of the United States and the United Kingdom, corporate board structure is not an
important governance mechanism because firms in many other countries are dominated by controlling shareholders
(La Porta, Lopez-de-Silanes, and Shleifer, 1999). This argument, however, only introduces a bias against us finding
a significant relation between board independence and foreign ownership. More importantly, Dahya, Dimitrov, and
McConnell (2008) provide direct evidence suggesting that board independence can be an effective monitoring
mechanism even in firms with controlling shareholders.

3
(especially foreign institutional investors) may actively monitor the corporations in which they

invest (Ferreira and Matos, 2008) which further promotes shareholder wealth maximization.

Our empirical work uses a panel data set of more than 50,000 firm-years from 80 non-

U.S. countries. We find support for our hypothesis that board independence is an important

determinant of the level of foreign ownership in firms around the world and that foreign

ownership is higher in firms with more independent directors. A firm that increases the

proportion of independent directors on its board from a third of its directors to two-thirds of its

directors increases its foreign ownership by between 0.4% and 1%. This is economically

significant given that the median firm in our sample has foreign ownership of only 1.1%. Our

findings hold after carefully accounting for several other possible determinants of foreign

ownership, and for the potential reverse causality arising from the possibility that the presence of

foreign owners may by itself cause higher levels of board independence.

We find that the positive relation between board independence and foreign ownership is

particularly strong in countries with less developed legal institutions and poorer protection of

property rights. These are the countries that are most likely to have higher monitoring costs

especially for foreign investors. The potentially high average cost of monitoring in these low

investor protection countries may increase the importance of independent directors as a

mechanism for reducing monitoring costs. In contrast, in countries with very high levels of

investor protection and well developed legal and governance institutions, such high quality

institutions may reduce the importance of independent directors as a mechanism for reducing the

difference in monitoring costs between domestic and foreign investors.

In additional analysis, we find that both U.S. and non-U.S. investors alike gravitate

towards the stocks of foreign firms with more independent boards. Most previous research on

4
foreign investing has focused on U.S. investment overseas due to availability of data. We are

able to confirm a similar relation between board independence and foreign investing for U.S. and

non-U.S. investors. We also find some evidence that board independence is more important to

institutional investors, who often have strict fiduciary responsibilities, than it is to other types of

foreign investors like foreign governments or foreign industrial firms.

Our finding that increasing board independence is an effective mechanism for attracting

foreign investors has important implications for corporate decision makers, especially for those

in countries with lower levels of investor protection. Access to foreign capital can be especially

valuable for firms in such countries because poor country-level investor protection is often

associated with less developed domestic capital markets (La Porta, Lopez-de-Silanes, Shleifer,

and Vishny, 1997). Our results indicate that firms can at least partially alleviate foreign

investors concerns about the lack of external legal protection of shareholder rights and can

signal a commitment not to engage in minority shareholder expropriation by increasing the

degree of independence of their corporate boards.

The remainder of the paper is organized as follows. Section II presents a brief literature

review and hypothesis development. Section III describes our data and methodology. Section IV

reports the empirical results on the relation between board independence and foreign ownership.

In Section V we provide some concluding remarks.

II. Literature Review and Hypothesis Development

Following the wave of corporate privatizations and stock market liberalizations that

started in the 1980s, firms around the world have had the opportunity to expand their shareholder

base by attracting foreign investors. These same innovations have allowed investors to more

readily improve the risk and return characteristics of their portfolios. However, numerous studies

5
have documented that despite these opportunities, the observed levels of foreign investment are

significantly below what is considered optimal under contemporary finance theory (French and

Poterba, 1991, Tesar and Werner, 1995, Chan, Covrig and Ng, 2005). While some of the equity

home bias is mitigated if one adjusts for the large stakes of closely held shares in many foreign

firms, the home bias is still a significant puzzle in portfolio theory (Dahlquist, Pinkowitz, Stulz,

and Williamson, 2003). While Cooper, Sercu and Vanpee (2012) report that measures of equity

home bias have shown a decline over the last 15 to 20 years (e.g., Bekaert and Wang (2009)

report an annual average decrease in equity home bias of 1.5% per year from 1997 to 2005), they

still report significant home bias in both industrialized countries and emerging markets. In our

sample of non-U.S. firms used in this study, the median firm had foreign ownership of only 1.1%

and we observe significant cross-sectional variation across firms and countries in the level of

foreign ownership.

Several theoretical and empirical studies have put forward various theories for the

persistence of the home bias in investor portfolio allocation. In their review article, Cooper,

Sercu and Vanpee (2012) suggest six types of explanations for equity home bias, including

hedging domestic risks, explicit costs of foreign investments, information asymmetries,

familiarity stemming from trade, governance and transparency issues, and behavioral biases.

They provide detailed references for the empirical work in these areas but argue that no one

explanation dominates the others.

Our research focuses on the role of governance and how concerns about expropriation by

insiders or the impact of poor regulatory and institutional environments might affect foreign

investment decisions. La Porta, Lopez-de-Silanes, and Shleifer (1999) report that the widely

diffuse ownership of firms that is typical in the U.S. and other wealthy countries is much less

6
common globally. Instead, large controlling shareholders are common, often consolidating

control through pyramidal structures, especially in countries with poor shareholder protection.

On the other hand, in countries with good shareholder protection and where the law protects

minority interests, investors are willing to pay more for their shares and thus controlling

shareholders reduce their holdings. Stulz (2005) formalizes the analysis of the twin agency

problems of sovereign states and corporate insiders potentially exploiting minority shareholders

in a theoretical model and demonstrates that diffuse ownership is inefficient in this setting. His

empirical work confirms that in countries with greater risk of expropriation and lower levels of

investor protection, firms are more likely to be closely held and family-controlled. Using foreign

holdings data of U.S. investors collected by the U.S. Treasury and Federal Reserve Board in

1997, Leuz, Lins and Warnock (2009), extend the testing of Stulzs (2005) predictions and show

that foreign investment in poorly governed firms, as measured by high levels of insider control

and by being located in countries with poor investor protection, is indeed lower.

These researchers, however, recognize that there may be private mechanisms through

which firms can attract foreign capital. For example, Ammer et al. (2012), using the same data as

Leuz, Lins and Warnock (2009), show that U.S. investment in a foreign firm can double when

the firm cross-lists on a U.S. exchange, even after correcting for the selection bias associated

with large, financially transparent and liquid firms already attractive to foreign investment being

more likely to cross-list. Doidge, Karolyi and Stulz (2007), among others, suggest that it is

difficult to overcome the negative impact of poor institutional infrastructure with better firm-

specific governance actions. Their empirical evidence shows that country characteristics have a

greater impact on firm governance ratings than do firm characteristics. Our research, by

7
measuring actual foreign investment in firms, looks directly at whether firms that have more

independent directors are able to some extent mitigate the equity home bias.

Our study also adds to the literature examining the relation between board composition

and investor base. There is some empirical evidence that board composition (and its effect on

monitoring costs) significantly affects the composition of a firms shareholder base. For

example, survey results by McKinsey & Company (2002) and McCahery, Sautner, and Starks

(2010) indicate that institutional investors favor firms with more independent boards. Further,

Chung and Zhang (2011) find that the positive relation between board independence and

institutional ownership is largely due to the lower cost of monitoring firms with more

independent boards.

Since information and monitoring costs will vary across firms (and across countries),

there may be significant cross-sectional variation in foreign investment across firms around the

world. In particular, we predict that, since information asymmetry and monitoring costs are

influenced by the composition of a firms board, cross-sectional differences in foreign ownership

will be explained, at least in part by differences in board structure. Since foreign investors

generally face higher monitoring costs than domestic investors, we predict that foreign investors

would gravitate toward the stocks of companies with more independent boards. Our central

hypothesis in this paper is that there will be a positive relation between board independence and

foreign ownership.

We make two further predictions with respect to the relation between board independence

and foreign ownership. First, Doidge, Karolyi and Stulz (2007) argue that country-level

characteristics and the degree of financial globalization explain a greater proportion of the

variation in governance around the world than do firm-level characteristics. They however also

8
find that firm-level characteristics are more important for firms in less developed countries that

access global capital markets. In countries with good investor protection and high quality legal

institutions, active capital market participants and diligent regulators help to monitor managers

and certify the quality of financial statements. These characteristics reduce the need for

additional oversight by independent directors. In contrast, in low investor protection countries,

given the lower quality of legal institutions and less developed capital markets, independent

directors may be more essential to actively monitoring management and certifying the quality of

financial statements. This suggests that in poor investor protection countries, independent

directors may be more useful in reducing the information asymmetry gap between foreign and

domestic investors than they would be in high investor protection countries. We thus predict that

the relation between board independence and foreign ownership will be more significant in low

investor protection countries than in high investor protection countries.2

Second, we note that there is significant heterogeneity among foreign investors. We

identify and classify foreign investors into two types institutional investors (e.g. mutual funds,

pension funds etc.) who often have additional fiduciary responsibilities to investors in their home

countries, and non-institutional investors (e.g. foreign governments, individuals, families, other

companies etc.). In general, institutional investors make passive investments and are usually

committed to delivering the best risk-return characteristics for the investors that they have a

fiduciary responsibility to. In contrast, governments, family firms, and other companies are

usually active or strategic investors, and often have aims and objectives that go beyond obtaining

the highest risk-adjusted returns. This suggests that institutional investors are more likely to rely

on the additional monitoring provided by independent directors than non-institutional investors

2
The Journal of Corporate Finances special issue on contemporary corporate finance research on South America
offers several papers that discuss the role of country and firm-characteristics in South American companies. See
Campello (2012) for an overview of this research.

9
who may either obtain a controlling stake (and conduct their own monitoring), or have other non-

value maximizing objectives for their investment. We thus predict that the relation between

foreign ownership and the presence of independent directors will be more significant for foreign

institutional investors than for foreign non-institutional investors.

As an additional consideration, we examine whether U.S. investors display different

preferences than non-U.S. investors with respect to board independence. Several earlier studies

have focused on U.S. investors due to the accessibility of investment data. We find that our

results are robust to the home country of the investor.

III. Data and Methodology

A. Data

Our initial sample consists of all publicly traded firms covered in the OSIRIS database

from 2001 through 2011. OSIRIS is a product of Bureau van Dijk Electronic Publishing, and

strives to include all publicly listed companies worldwide. It provides financial, stock, and

ownership data as well as information on the board of directors for more than 45,000 firms from

more than 130 countries. The Bureau van Dijk databases (including OSIRIS and its European

counterpart Amadeus) have been recently used by Li, Moshirian, Pham, and Zein (2006), Faccio,

Marchica, and Mura (2011), Ferreira, Kirchmaier, and Metzger (2012), and Miletkov, Poulsen,

and Wintoki (2013), among others.

We classify shareholders as foreign if they are domiciled in a country other than the

firms country of incorporation. If the firms main country of operation is different from the

firms country of incorporation (often due to tax considerations), we also require that the foreign

shareholders are domiciled outside of the firms main country of operation. Following Ferreira

10
and Matos (2008), we measure foreign ownership as the sum of the shares held by foreign

investors, including both direct and indirect company holdings, as a percentage of the firms total

shares outstanding. Leuz, Lins, and Warnock (2009) use a slightly different measure where

foreign ownership is scaled by the firms free float (i.e. the number of shares not closely held)

instead of by market capitalization. The main variable of interest in their analysis is insider

ownership and, as documented by Dahlquist et al. (2003), there would be a mechanical relation

between insider and foreign ownership without their scaling. In our study, we explicitly control

for the effect of insider ownership on foreign ownership, and therefore, scale our foreign

ownership variable by market capitalization as in Ferreira and Matos (2008).

The main explanatory variable in our analysis, board independence, is defined as the

number of independent board members divided by the total number of directors on the

companys board. We classify board members as independent if they are identified in OSIRIS as

one of the following: non-executive director, outside director, or independent director. OSIRIS

identifies this information from multiple sources, including company filings, company websites,

and press releases as well as direct inquiries with the companies. Some directors are classified in

OSIRIS as non-executive and non-independent. We do not classify these directors as

independent, because even though these directors do not work directly for the firm or its

subsidiaries, they have other affiliations with the company or its insiders. Our main results are

robust to using an alternative definition of board independence based only on those directors

specifically identified in OSIRIS as independent rather than non-executive director or outside

director.

We obtain data on the additional company- and country-specific characteristics used in

the subsequent regression analysis from OSIRIS, Worldscope, Thomson ONE Banker, and the

11
World Banks World Development Indicators. We measure the quality of a country's property

rights institutions and overall governance environment using the Legal Structure and Security of

Property Rights Index from Gwartney and Lawson (2007). Since the index varies little over time,

we use the 2005 level for all of our analysis.

Throughout our analysis, we also control for a number of time-varying firm-specific

characteristics that have been documented by prior studies to affect the portfolio allocation

decisions of foreign investors. The list of control variables includes dummy variables which

equal one if the firm follows International Financial Reporting Standards (IFRS), is cross-listed

on a U.S. exchange, is included in a major market index, or is audited by a big N auditor, and

zero otherwise. We also control for the degree of ownership concentration and the number of

analysts following the firm as well as for firm size, leverage, market-to-book ratio, dividend

yield, and firm age. The last set of explanatory variables includes board size, CEO duality, and

the presence of a dual-board structure. These are all potentially related to the degree of board

independence, and may also affect the level of foreign ownership in the firm. Table 1 lists the

definitions and data sources for the ownership, board and control variables that we use in the

paper.

Table 2 present summary statistics for our sample of 58,287 firm-years from 80 non-U.S.

countries.3 These data suggest that our sample firm-years have a fairly substantial international

presence. Foreign shareholders own, on average, approximately 8 percent (median 1.11 percent)

of the firm-years outstanding shares with U.S. foreign ownership accounting for approximately

3 percent on average (0 percent median). Foreign institutions own an average 6.4 percent (1.09

percent median) of the firm-years shares. Forty percent of the firm-years follow International

3
We exclude companies incorporated in major offshore financial centers and tax havens such as: The Bahamas,
Barbados, Bermuda, British Virgin Islands, Cayman Islands, Marshall Islands, and Netherlands Antilles.

12
Financial Reporting Standards (IFRS). In addition, U.S. listing, inclusion in a major market

index, and having a big N auditor account for 2, 26, and 62 percent of firm-years, on average,

respectively. Foreign sales for our sample average 19.18 percent (7.37 percent median) of total

sales for the firm-years.

With respect to governance considerations, insiders hold, on average, 23 percent (0

percent median) of the shares. The average board size of our sample firm-years is 6.42 with

approximately one third of board members being independent. Dual board structure is observed

in 8 percent of the firm-years and the CEO is also the Chair of the Board in 7 percent of our

firm-years. In addition, there is an average of 3.1 analysts following each firm-year.

Consistent with their international presence, the average firm-year in our sample has

market capitalization of approximately $1.55 billion (median of $138 million) and averages 39

years old (median 25 years old). The firm-years represent firms that are relatively strong

financially with an average market-to-book ratio of 2.10 (median 1.31), leverage of 0.49 (median

0.50) and dividend yield of 2.25 percent (median 1.07 percent). Market capitalization of the

home country relative to GDP averages 107.05 percent and GDP per capita averages $23,192.

Panel A of Table 3 illustrates the geographical distribution of our sample firm-years.

Overall, our sample is geographically diverse with firm-years from Europe and Asia accounting

for approximately 44 and 36 percent of the sample, and firms from Oceania and Northern

America (excluding the U.S.) accounting for roughly 10 and 7 percent of all firm-years. The

remainder of the sample is almost evenly split between firms from Latin America and Africa

each accounting for approximately 2 percent of the final sample. The last column in Panel A of

Table 3 documents that the fraction of firm-years with at least some foreign ownership is

13
remarkably similar across world regions ranging from 55 percent in Oceania to 73 percent in

Latin America and the Caribbean.

Panel B of Table 3 reports the average number of directors on a board by world region.

The largest average board size is in Northern America (excluding the U.S.) (9.40 members) and

the smallest average board size is in Latin American and the Caribbean (4.94 members). The

average board independence ranges from an average low of 18 percent in Asia to a high of 77

percent in northern America (excluding the U.S.). Africa, Europe, and Latin America and the

Caribbean average close to 50 percent independence (47 percent, 45 percent, and 53 percent

respectively). Oceania averages 60 percent independence.

In Table 4, we examine the degree of correlation among our variables. Many of the

correlation coefficients are significantly different from zero, which emphasizes the importance of

including these variables as controls in the subsequent regression analysis. At the same time,

none of the correlation coefficients are excessively high which helps alleviate concerns about

multicollinearity. The highest degree of correlation (0.691) is between log (number of analysts)

and log (market capitalization).

B. Methodology.

The ability and incentives of foreigners to purchase domestic equity securities are largely

based on country-specific factors such as the presence of direct and indirect barriers to foreign

equity investment, the level of financial and economic development, and the quality of legal

protection of investor rights. To account for the time-invariant firm- and country-level

determinants of foreign ownership, we estimate firm fixed-effects regressions. Thus, our

14
empirical tests explore the effect of the within firm variation in board independence on the ability

of firms to attract foreign equity capital.

It is quite possible that some of our explanatory variables are themselves affected by the

presence of foreign shareholders. For example, Aggarwal, Erel, Ferreira, and Matos (2011)

specifically test and find support for the hypothesis that foreign institutional investors actively

promote governance improvements, as measured by a variable aggregating 41 governance

components, in firms outside of the U.S. In studies of the U.S., Chung and Zhang (2011) find a

positive relation between institutional ownership and corporate governance but argue that the

direction of causation reflects institutional preference toward companies with better corporate

governance and not vice versa. Similarly, Gillan, Hartzell and Starks (2011) find that powerful

boards serve as a substitute for the market for corporate control and that causality runs from

stronger boards to more governance charter provisions.

To alleviate the reverse causality concerns in our work, we use lags of all explanatory

variables and also estimate dynamic GMM regressions following Arellano and Bond (1991),

Arellano and Bover (1995), and Blundell and Bond (1998). An additional benefit from using the

dynamic GMM estimator is that we can account for the persistence in ownership structure by

including lagged values of the dependent variable (foreign ownership) in the analysis.4 In

addition to our alternative methodology, our results may differ from Aggarwal, et al. (2011), due

to our focus on board independence as compared to their composite measure. For example, a

higher degree of board independence may provide a stronger signal to foreign investors that

other governance features may respond to foreign investor preferences, consistent with Gillan,

4
We cannot include lagged values of the dependent variable (foreign ownership) in the fixed-effects model because
it is mechanically correlated with past realizations of the error term.

15
Hartzell and Starks (2011) and Chung and Zhang (2011). Future research should investigate

which governance features are most sensitive to investor pressure.

An alternative strategy for dealing with the endogeneity concerns in most corporate

governance studies is to estimate Two-Stage Least Squares (2SLS) regressions with instrumental

variables. The main challenge with this approach, however, is identifying valid instrumental

variables that are correlated with the endogenous explanatory variable, but uncorrelated with the

error term (). A recent study by Knyazeva, Knyazeva, and Masulis (2013) demonstrates that one

potentially valid instrument for board independence is the local supply of potential directors.

These authors point out that since qualified directors are a scarce human resource, firms located

near larger pools of qualified directors should find it easier and less costly to attract outside

directors. Using the local pool of qualified directors as an instrumental variable for board

independence is conceptually appealing for our study as well, because the local/domestic pool of

qualified directors can affect the level of foreign ownership through the board independence

channel (and through some of the other explanatory variables in the model, such as the country's

level of financial and economic development), but it should not have an independent effect on

the level of foreign ownership.

Since the majority of outside directors are usually either directors and/or executives at

other firms (Guner, Malmendier, and Tate 2008, Linck, Netter, and Yang, 2009), we create two

time-varying proxies for the local/domestic supply of potentially qualified directors: the total

number of directors residing in the firms home country and the sum of the number of executives

and directors residing in the firms home country.5 In unreported first stage regressions, both of

our instrumental variables are highly significantly related to the level of board independence.

5
We obtain this data from the OSIRIS database which identifies the names, titles, and country of residence for
board members and top executives at publicly traded firms around the world.

16
Having more than one instrumental variable allows us to perform over-identification tests and we

find that our results are robust to using either of these two instrumental variables alone.

III. Empirical Results.

A. Board independence and foreign ownership

We first present the results from panel OLS regressions. Even though these estimations

are subject to bias, which we address in the subsequent analysis, they provide a useful

benchmark for comparison with prior studies. Note that the number of observations in our

regression analysis is smaller than the number of observations presented in the summary

statistics in Table 2. This is due to the use of lags of all independent variables requiring us to

drop the first year that a firm appears in our sample.

The results from column 1 in Table 5 support our main hypothesis that board

independence is an important determinant of the level of foreign investment in non-U.S. firms.

Of the other board characteristics board size, dual-board structure, and CEO duality only

dual-board structure is statistically, and negatively, related to foreign investors portfolio

allocation decisions. It is somewhat difficult to compare board characteristics of firms with dual-

board structures to firms with unitary boards. Therefore, in unreported analysis, we re-estimate

all regressions after dropping firms with dual-board structures. Excluding these firms from the

analysis does not affect any of our main findings.

The coefficients on the majority of the control variables are consistent with the findings

in prior literature. Foreign ownership is positively related to the quality of the firms information

environment as proxied by analyst following and the adoption of International Financial

Reporting Standards (IFRS). Foreign investors also tend to gravitate toward the stocks of firms

that are cross-listed in the United States, are included in a major market index or are audited by a

17
big N auditor. Finally, our proxy for ownership concentration (percent closely held) reveals that

foreign investors are, on average, reluctant to invest in firms with concentrated ownership

structures.

As discussed in the methodology section of the paper there are potentially a host of

unobservable firm- and country-specific factors that are related to both corporate board structure

and to the portfolio allocation decisions of foreign equity investors. In order to mitigate this

omitted variable bias we estimate firm fixed-effects regressions and present the results in column

2 of Table 5. The coefficient on our main variable of interest, board independence, is still

positive and highly significant supporting our main hypothesis that increasing board

independence is an effective mechanism for attracting foreign equity investors.

The fixed-effects regression model alleviates some endogeneity concerns, but the

estimation is still subject to dynamic endogeneity in the sense that past values of our dependent

variable (foreign ownership) may affect the degree of board independence. To account for this

we include lagged foreign ownership as an additional independent variable and estimate dynamic

GMM regressions. As discussed in Beck, Levine, and Loayza (2000), Hoechle, Schmid, Walter,

and Yermack (2012), and Wintoki, Linck, and Netter (2012), the dynamic GMM estimation

procedure accounts for unobservable heterogeneity, simultaneity, and reverse causality. The

results from the dynamic GMM regression, which are presented in column 3 of Table 5, lend

further support for our main argument that there is a positive causal relation between board

independence and foreign ownership.6

6
We run additional tests to ensure the validity of our lagged instruments and find that they are appropriate for our
analysis. If our specification is valid, there should be no second order serial correlation, and we should not reject the
validity of our instruments using a Hansen test of over-identification. In all our dynamic GMM regressions, we
report AR2 (from second order serial correlation tests), and Hansen J statistics (from over-identification tests) that
suggest we cannot reject the validity of our lagged instrument set.

18
 In the last column of Table 5 we estimate a Two-Stage Least Squares (2SLS) regression

where we use the supply of local/domestic directors as instrument for board independence. As

discussed in the methodology section of the paper, the supply of local directors is a potentially

valid instrument, because it can indirectly affect foreign ownership through the degree of board

independence and through some of the other independent variables in our model, but it should

not have a direct effect on foreign ownership. The results in column 4 of Table 5 indicate that the

exogenous component of board independence is positively, and significantly, related to the

degree of foreign ownership in non-U.S. firms.

While statistical significance is important, it is also essential to examine the economic

significance of our results. The estimated coefficient on board independence ranges from 1.26 in

the fixed-effects regression to 3.09 in the dynamic GMM regression. This suggests that a one

standard deviation increase in the level of board independence leads to an increase in total

foreign ownership ranging from approximately 0.49 percent to 1.21 percent. This is clearly

economically significant since the mean (median) level of foreign ownership in our sample firms

is only 7.99 percent (1.11 percent).

B. The relation between board independence and foreign ownership in high versus low

investor protection countries.

The main hypothesis in our paper is that foreign investors gravitate toward the stock of

firms with more independent boards because by appointing independent directors, firms (and

their controlling shareholders) are subjecting themselves to additional oversight which signals

their commitment not to engage in minority shareholder expropriation and insider self-dealing.

The benefit from signaling a commitment to higher levels of investor protection is significantly

19
larger in environments where the external mechanisms for protecting investor rights are less

adequately developed and minority shareholder expropriation is more likely to occur. Therefore,

we expect that the relation between the degree of board independence and foreign ownership will

be significantly stronger in countries with lower levels of investor protection.

We investigate this hypothesis by splitting our sample based on the quality of external

legal protection of investor rights, measured using the Legal Structure and Security of Property

Rights Index (legal index) from Economic Freedom of the World (Gwartney and Lawson, 2007).

We define countries that are in the top quartile of the legal index as high investor protection

countries and all other countries we define as low investor protection countries. As Table 6

illustrates, across all specifications the positive effect of board independence on foreign

ownership is concentrated in countries with less developed legal institutions. This finding

suggests that foreign investors pay closer attention to firm-level governance attributes when

country-level governance mechanisms are not well functioning, and is consistent with the view

that country- and firm-level governance mechanisms act as substitutes (Ferreira and Matos,

2008, Leuz, Lins, and Warnock, 2009, McCahery, Sautner, and Starks, 2010).

La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1997) document that countries with

lower levels of investor protection have less developed domestic capital markets. In such

countries, therefore, access to foreign capital can be significantly more valuable to firms. In this

context, our findings suggest that corporate decision makers can at least partially overcome their

countrys institutional deficiencies and broaden their firms shareholder base by increasing the

degree of independence of their corporate boards.

20
C. The effect of board independence on different types of foreign investors.

Many prior studies on the effects and determinants of foreign ownership use U.S.

ownership as proxy for total foreign ownership (Brennan and Cao, 1997, Dahlquist et al, 2003,

Aggarwal, Klapper, and Wysocki, 2005, Leuz, Lins, and Warnock, 2009). This is largely due to

data considerations since U.S. data is more readily available, but also due to the fact that U.S.

investors are the largest block of foreign equity investors in the world (Leuz, Lins, and Warnock,

2009, Ammer et al, 2012). Our dataset includes both U.S. and non-U.S. foreign investors, and

therefore allows us to investigate whether there are differences in the preferences for board

independence between these two groups of investors. Table 7 documents that both U.S. and non-

U.S. investors alike have a strong preference for the stocks of firms with more independent

corporate boards. Except for the IV-2SLS specification in the non-US ownership regression, all

specifications document a positive and significant effect of board independence on foreign

ownership by U.S. and non-U.S. investors.

In a recent U.S. study, Chung and Zhang (2011) find that institutional investors have

strong preference for the stocks of firms with good corporate governance practices. These

authors also suggest that corporate governance considerations are less likely to affect the

investment decisions of non-institutional investors because they are less likely to actively

monitor the firms in which they invest and they are not subject to the same strict fiduciary

responsibilities as institutional investors. The argument that the investment decisions of non-

financial investors are less influenced by corporate governance considerations is also consistent

with the notion that individual investors mainly gravitate toward attention-grabbing stocks

(Barber and Odean, 2008), while industrial firms base their investment decisions on strategic

considerations, such as entry or expansion into a foreign market. In addition, the investment

21
decisions of governments and their sovereign wealth funds are often subject to strategic and

political considerations.

In Table 8, we examine whether foreign institutional investors are driving the positive

relation between board independence and foreign ownership by splitting the foreign ownership

variable into ownership by foreign financial institutions (e.g., banks, mutual and pension funds,

insurance companies) and ownership by other foreign investors (e.g., individuals/families,

industrial companies, governments). Earlier studies (e.g., Aggarwal, et al., 2011) focus on

foreign institutional investors so this separation allows us to specifically consider the role of

institutional vs. non-institutional investors. The results indicate that increasing board

independence is an effective mechanism for attracting foreign institutional investors, but it is

unlikely to result in an influx of capital from other types of foreign investors. This result supports

the premise that institutional investors are more likely to emphasize board independence in their

investment decisions compared to other categories of investors. In additional unreported analysis

we split the other foreign ownership category into ownership by foreign individuals/families,

industrial companies, and governments and find that none of these individual categories are

significantly related to board independence.

Table 9 specifically considers whether different types of institutional investors respond

differently to the presence of independent boards. Based on available data, we are able to classify

institutional investors into several categories including mutual funds, banks, insurance firms,

private equity firms and other financial firms for analysis. Several other categories, including

hedge fund firms, venture capital funds and foundations had insufficient observations for

complete analysis. Overall, we find that board independence has a positive and significant

impact on foreign institutional ownership regardless of institutional investor type. This result is

22
consistent with earlier work, such as Chung and Zhang (2011), which find few significant

differences across types of institutional investors and corporate governance characteristics of

firms.

IV. Concluding Remarks.

Financial theory and empirical evidence suggest that individual firms and entire countries

can benefit from foreign equity investment. However, numerous academic studies have

documented that investors are often reluctant to invest abroad despite the large potential benefits

from international portfolio diversification. Several possible contributing factors to this

phenomenon, known as the equity home bias, have been suggested including information

asymmetries about foreign markets or firms, higher costs of foreign investment, and behavioral

biases. Concern that insiders in closely held foreign firms may expropriate minority shareholder

interests is also a frequently identified issue for investors.

Our results suggest that firms may be able to attract foreign capital by choosing to have

more independent corporate boards that may limit self-serving actions of insiders. We show that

firms with more independent boards are associated with having higher foreign ownership and our

results are robust to methodologies that address potential endogeneity between these two factors.

This relation is strongest in countries with lower quality legal and regulatory institutions,

suggesting that board independence may help provide investor protection in these countries.

Prior studies have demonstrated that foreign investors prefer to invest in the stocks of

firms that are cross-listed in the United States, and are reluctant to invest in the stocks of firms

that have highly concentrated ownership structures (Ferreira and Matos, 2008, Leuz, Lins, and

Warnock, 2009, Ammer et al 2012). Cross-listing in the United States, however, may be

23
prohibitively expensive for many companies and reducing the firms level of ownership

concentration may be outside of the managers and the board of directors control. In addition,

when ownership is concentrated in the hands of company insiders this may already represent an

efficient response to the firms contracting and operating environments (La Porta, Lopez-de-

Silanes, Shleifer, and Vishny, 1998, La Porta, Lopez-de-Silanes, and Shleifer, 1999, Kho, Stulz,

and Warnock, 2009).

Our findings indicate that companies can use an alternative mechanism for attracting

foreign equity investors. Individual firms can subject themselves to additional monitoring and

signal a commitment to protect shareholder rights and thereby attract foreign equity investors

by appointing additional independent directors on their corporate boards. This firm-level

commitment to better corporate governance is especially important for attracting foreign

investors in countries with poor legal protection of investor rights where the likelihood of insider

self-dealing and minority shareholder expropriation is significantly higher. We also find that

institutional investors, as opposed to other categories of investors, show a preference for

investing in firms with more independent boards.

The ability and incentives of independent board members to actively monitor company

insiders is a function of individual, firm, and institutional characteristics. Foreign investors,

especially foreign institutional investors, are presumably sophisticated and should be able to

distinguish between directors who are independent in name only and those that actively

monitor company management and contribute to shareholders wealth maximization. Fama and

Jensen (1983) argue that the market for corporate directors is one of the main incentive

mechanisms for ensuring that outside directors diligently perform their fiduciary duties. Future

studies can examine how institutional characteristics, such as the competitiveness of the

24
domestic market for independent directors, affect the relation between board independence and

foreign ownership.

25
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29
Table 1
Variables used in the paper, their definitions and primary sources.
This table lists the variables used in our estimations, their definitions, and the source of each data
item.
Shares held by foreign investors as percent of
total shares outstanding. Based on ultimate
Total foreign ownership (%)
holdings, including direct and indirect
ownership. Source: OSIRIS
Number of independent directors divided by
Board independence total number of directors on the companys
board. Source: OSIRIS
Number of directors on the companys board.
Board size
Source: OSIRIS
Indicator variable which takes the value of one
if the firm has a dual board structure
Dual board structure
(supervisory and management board), and zero
otherwise. Source: OSIRIS
Indicator variable which takes the value of one
if the CEO is also the chairman of the firms
CEO = Chair of Board
board of directors, and zero otherwise. Source:
OSIRIS.
Indicator variable which takes the value of one
if the firm follows International Financial
IFRS reporting
Reporting Standards (IFRS), and zero
otherwise. Source: Worldscope
Indicator variable which takes the value of one
US listing if the firm is cross-listed in the U.S., and zero
otherwise. Source: OSIRIS
Indicator variable which takes the value of one
Included in a market index if the firm is included in a market index, and
zero otherwise. Source: OSIRIS
Indicator variable which takes the value of one
Big N auditor if the firm is audited by a big N auditor, and
zero otherwise. Source: OSIRIS
Market capitalization of the firms equity
Market capitalization ($mm) measured in millions of US dollars. Source:
OSIRIS
Market value of equity divided by book value
Market to book ratio
of equity. Source: OSIRIS
Number of years since the firms date of
Firm age (years)
incorporation. Source: OSIRIS
Dividend yield Dividend yield. Source: OSIRIS
Total Liabilities divided by Total Assets.
Leverage Source: OSIRIS

30
 Number of analysts following the firms stock.
Number of analysts
Source: OSIRIS
Closely held shares as percent of total shares
Insider ownership (%)
outstanding. Source: Thomson ONE Banker
Foreign sales as percent of total sales. Source:
Foreign Sales (%)
Worldscope
Total market capitalization of listed companies
as a percentage of gross domestic product.
Market Cap/GDP (%)
Source: World Banks World Development
Indicators
Gross domestic product divided by midyear
population. Data are in constant U.S. dollars.
GDP per capita ($)
Source: World Banks World Development
Indicators
Shares held by foreign U.S. investors as
percent of total shares outstanding. Based on
Foreign US Ownership (%)
ultimate holdings, including direct and indirect
ownership. Source: OSIRIS
Shares held by foreign institutional investors as
percent of total shares outstanding. Based on
Foreign Institutional Ownership (%)
ultimate holdings, including direct and indirect
ownership. Source: OSIRIS

31
 Table 2
Summary Statistics.
This table reports descriptive statistics for key variables used in the paper. The sample includes
58,287 firm-years from 80 non-U.S. countries. Sample firms are identified from the OSIRIS
database for years 2001-2011. Data sources include OSIRIS, Worldscope, Thomson ONE
Banker, and the World Banks World Development Indicators. All variables are as described in
Table 1.
Mean S.D. 25th Pctl Median 75th pctl N
Total foreign ownership (%) 7.99 14.85 0.00 1.11 9.24 58,287
Board independence 0.39 0.39 0.00 0.33 0.75 58,287
Board size 6.42 3.74 4.00 6.00 8.00 58,287
Dual board structure 0.08 0.27 0.00 0.00 0.00 58,287
CEO = Chair of Board 0.07 0.25 0.00 0.00 0.00 58,287
IFRS reporting 0.40 0.49 0.00 0.00 1.00 58,287
US listing 0.02 0.14 0.00 0.00 0.00 58,287
Included in a market index 0.26 0.44 0.00 0.00 1.00 58,287
Big N auditor 0.62 0.49 0.00 1.00 1.00 58,287
Market capitalization ($mm) 1,552 7,797 34 138 607 58,287
Market to book ratio 2.10 2.63 0.76 1.31 2.42 58,287
Firm age (years) 39.3 39.0 12.0 25.0 55.0 58,287
Dividend yield 2.25 3.45 0.00 1.07 3.25 58,287
Leverage 0.49 0.26 0.29 0.50 0.66 58,287
Number of analysts 3.1 5.6 0.0 1.0 4.0 58,287
Insider ownership (%) 23.53 28.10 0.00 0.00 33.13 58,287
Foreign Sales (%) 19.18 30.07 0.00 7.37 46.53 58,287
Market Cap/GDP (%) 107.05 67.02 66.41 103.60 134.10 58,287
GDP per capita ($) 23,192 11,779 19,781 25,249 29,627 58,287
Foreign US Ownership (%) 2.96 7.12 0.00 0.00 2.30 58,287
Foreign Institutional Ownership (%) 6.40 11.46 0.00 1.09 7.90 53,941

32
 Table 3
Geographic distribution of sample firms and board characteristics across world regions.
This table reports the geographic distribution of our sample firms and board characteristics
across world regions based on 58,287 firm-years from 80 non-U.S. countries. Sample firms are
identified from the OSIRIS database for years 2001-2011.

Panel A: Geographic distribution sample firms

Number of Fraction of Number of firm-years Fraction of firm-years
World regions firm-years total sample from region with from region with
from region from region foreign ownership foreign ownership
Africa 1,030 1.77% 681 66.12%
Asia 21,099 36.20% 13,179 62.46%
Europe 25,394 43.57% 15,407 60.67%
Latin America and the Caribbean 1,205 2.07% 880 73.03%
Northern America (excluding the U.S.) 3,921 6.73% 2,619 66.79%
Oceania 5,638 9.67% 3,102 55.02%

Panel B: Board characteristics across world regions

Number of firm- Average Number of
World Region years from region Directors Average Board Independence
Africa 1,030 7.80 0.47
Asia 21,099 6.67 0.18
Europe 25,394 5.82 0.45
Latin America and the Caribbean 1,205 4.94 0.53
Northern America (excluding the U.S.) 3,921 9.40 0.77
Oceania 5,638 6.15 0.60

33
Table 4
Correlation matrix of descriptive variables for our sample of 58,287 firm-years from 80 non-U.S. countries.
Sample firms are identified from the OSIRIS database for years 2001-2011. Correlation coefficients in bold show a significant relation. All variables
are as described in Table 1.
Total foreign Board Log(board Dual board CEO = Chair IFRS Included in a Big N Log(market
US listing
ownership independence size) structure of Board reporting market index auditor capitalization)
Total foreign
1
ownership
Board
0.143 1
independence
Log(board
0.145 0.137 1
size)
Dual board
0.049 0.391 0.052 1
structure
CEO = Chair
0.007 -0.095 -0.041 -0.024 1
of Board
IFRS
0.202 0.286 0.118 0.23 -0.011 1
reporting
US listing 0.067 -0.078 0.052 -0.025 0.046 -0.101 1
Included in a
0.219 0.068 0.049 0.257 0.103 0.289 0.087 1
market index
Big N auditor 0.157 0.028 0.119 0.002 0.007 0.034 0.015 0.172 1
Log(market
0.266 -0.113 0.169 0.05 0.014 0.013 0.062 0.448 0.276 1
capitalization)
Market to
0.055 0.024 -0.032 -0.001 0.008 0.06 0.017 0.069 -0.027 0.213
book ratio
Log(firm age) 0.018 -0.169 0.005 0.103 0.025 -0.066 0 0.2 0.128 0.29
Dividend
0.033 0.008 0.066 -0.011 -0.022 0.017 -0.044 0.022 0.116 0.105
yield
Leverage 0.032 -0.074 -0.044 0.086 0.034 0.03 -0.012 0.17 0.046 0.136
Log(number
0.329 0.007 0.226 0.085 0.044 0.13 0.1 0.476 0.274 0.691
of analysts)
Insider
0.022 0.004 0.023 0.013 0.057 -0.012 -0.05 0.007 0.014 0.107
ownership
Foreign Sales 0.197 0.076 0.112 0.114 0.068 0.147 0.086 0.274 0.181 0.254
Market
0.04 0.168 0.143 -0.208 0.011 -0.061 0.015 -0.091 0.098 -0.007
Cap/GDP
Log(GDP per
0.062 0.173 -0.112 0.098 0.054 0.172 0.038 0.163 0.263 -0.018
capita)

34
Table 3 (continued)
Market to Log(firm Dividend Log(number Insider Foreign Market Log (GDP
Leverage
book ratio age) yield of analysts) ownership Sales Cap/GDP per capita)
Market to
1
book ratio
Log(firm
-0.101 1
age)
Dividend
-0.105 0.103 1
yield
Leverage 0.058 0.176 0.022 1
Log(number
0.142 0.139 0.103 0.167 1
of analysts)
Insider
-0.007 0.137 0.066 0.052 0.047 1
ownership
Foreign
0.02 0.129 0.014 0.1 0.335 0.092 1
Sales
Market
0.034 -0.045 0.016 -0.13 -0.032 0.014 0.071 1
Cap/GDP
Log(GDP
-0.054 0.073 -0.024 -0.043 0.038 -0.077 0.17 0.107 1
per capita)

35
Table 5
Does board independence attract foreign equity investors?
This table presents the results from the regression of foreign investing in firms from 2001 to 2011. The
dependent variable is the sum of the shares held by foreign investors as a percentage of the firms total
shares outstanding. Board independence is the number of independent board members divided by the total
number of directors on the companys board. All other variables are as described in Table 1. Four
regression methodologies are reported: ordinary least squares, firm fixed effects, dynamic GMM and two-
stage least squares. All standard errors are clustered by firm and all regressions (except OLS) include firm
fixed effects. All regressions also include year fixed effects. *, **, and *** represent significance at the
10%, 5% and 1% levels respectively.

(1) (2) (3) (4)

VARIABLES OLS Fixed Effects Dynamic GMM IV-2SLS
Board independence (t - 1) 2.4598*** 1.2574** 3.0882*** 2.3597***
(5.39) (2.08) (12.89) (4.57)
Log(board size) (t - 1) 0.0671 -0.2070 0.0421 -0.0910
(0.45) (-1.10) (0.38) (-1.55)
Dual board structure (t - 1) -2.9271*** -2.6646*** -2.6719*** -1.4921***
(-3.99) (-2.94) (-8.10) (-4.01)
CEO = Chair of Board (t - 1) -0.0725 -0.4422 -0.1813 0.0740
(-0.18) (-0.83) (-0.60) (0.42)
IFRS reporting (t - 1) 4.0772*** 3.1965*** 0.8785*** 0.6102***
(11.33) (7.94) (4.59) (5.14)
US listing (t - 1) 4.4596*** -3.3738** 2.2209*** 1.0941***
(4.52) (-2.19) (3.66) (2.72)
Included in a market index (t - 1) 0.7098** 1.2191*** 0.7812*** 0.4134***
(2.13) (2.73) (3.33) (3.06)
Big N auditor (t - 1) 1.6126*** 0.1091 0.4085*** 0.1777**
(7.92) (0.31) (2.67) (2.02)
Log(market capitalization) (t - 1) 1.2337*** 0.9282*** 0.4620*** 0.4162***
(13.63) (6.15) (8.02) (12.10)
Market to book ratio (t - 1) 0.0766* -0.0611 0.1422** 0.1090***
(1.83) (-1.33) (2.50) (5.44)
Log(firm age) (t - 1) -0.4364*** 2.6045* -0.1849** -0.1577**
(-3.20) (1.93) (-2.43) (-2.42)
Dividend yield (t - 1) 0.0189 0.0583** -0.0812** -0.0334**
(0.63) (2.16) (-1.99) (-2.48)
Leverage (t - 1) -0.1331 -1.3627* -0.4696* -0.3133*
(-0.34) (-1.86) (-1.75) (-1.73)
Log(number of analysts) (t - 1) 2.9532*** 1.7433*** 1.3509*** 0.9793***
(15.67) (7.72) (8.34) (13.19)
Percent closely held (t - 1) -0.0088** 0.0012 -0.0084** -0.0080***
(-2.19) (0.27) (-2.03) (-4.68)
Foreign Sales (t - 1) 0.0275*** -0.0005 0.0135*** 0.0078***
(6.45) (-0.08) (4.27) (4.22)
Market Cap/GDP (t-1) -0.0017 0.0046 0.0032* 0.0035***
(-0.40) (1.25) (1.84) (2.70)
Log(GDP per capita) (t - 1) -5.2773** -1.4489 0.0998 0.0535

36
 (-2.00) (-0.43) (1.60) (1.17)
Foreign Ownership (t - 1) 0.7064*** 0.8091***
(28.98) (106.05)
Constant 28.3954 -0.5874 -2.9853*** -2.6315***
(1.06) (-0.02) (-4.13) (-3.15)
Observations 43,225 43,270 31,078 43,225
R-squared 0.285 0.167 0.682
Cragg-Donald Wald F Statistic 2516.07
AR(2) 0.73
Hansen J Statistic 0.52 0.33
Difference Hansen J statistic 0.7

37
Table 6
The effect of board independence on foreign ownership in high versus low investor protection countries.
This table presents the results from the regression of foreign investing in firms from 2001 to 2011, separated into high vs. low investor protection
countries. High investor protection countries are those in the top quartile of the legal rights index. The dependent variable is the sum of the shares held by
foreign investors as a percentage of the firms total shares outstanding. Board independence is the number of independent board members divided by the
total number of directors on the companys board. All other variables are as described in Table 1. Four regression methodologies are reported: ordinary
least squares, firm fixed effects, dynamic GMM and two-stage least squares. All standard errors are clustered by firm and all regressions (except OLS)
include firm fixed effects. All regressions also include year fixed effects. *, **, and *** represent significance at the 10%, 5% and 1% levels
respectively.

OLS Fixed Effects Dynamic GMM IV-2SLS

VARIABLES High Others High Others High Others High Others
Board independence (t - 1) 1.5325 2.6483*** -0.4394 1.8247** 1.3337 2.7903*** -2.8436 3.7721***
(1.56) (5.20) (-0.49) (2.52) (1.22) (10.17) (-1.48) (5.20)
Log(board size) (t - 1) 1.1328** -0.1062 0.3981 -0.3106 0.3066 0.1010 0.0596 -0.1208*
(2.49) (-0.66) (0.98) (-1.50) (1.02) (0.80) (0.31) (-1.83)
Dual board structure (t - 1) -0.9819 -4.1401*** 0.5538 -6.2446*** -0.5864 -3.6386*** 2.3747*** -2.4686***
(-0.88) (-3.45) (0.49) (-3.98) (-0.97) (-5.81) (3.10) (-4.00)
*
CEO = Chair of Board (t - 1) 0.7165 -0.1894 3.9441 -0.6739 2.6478 -0.6810** 0.6274 0.0610
(0.45) (-0.47) (1.88) (-1.21) (1.59) (-2.19) (0.78) (0.29)
IFRS reporting (t - 1) 0.4241 5.6837*** -0.2146 4.0200*** 0.0531 1.9885*** -0.0163 1.1201***
(0.63) (12.90) (-0.28) (8.36) (0.10) (6.69) (-0.05) (6.41)
US listing (t - 1) -2.2529 5.4299*** -4.8749 ***
-2.7102 0.8084 2.1469*** -0.1824 1.6037***
(-0.77) (5.25) (-2.98) (-1.36) (0.30) (3.47) (-0.12) (3.66)
Included in a market index (t - 1) 0.1807 0.9185** 0.8622 1.3318** 0.4732 -0.0187 -0.1354 0.1764
(0.27) (2.39) (1.32) (2.30) (0.78) (-0.07) (-0.43) (1.13)
Big N auditor (t - 1) 2.3778*** 1.3397*** 0.5353 0.0120 0.7862** 0.3220* 0.5052*** 0.0603
(5.07) (5.94) (0.61) (0.03) (2.11) (1.93) (2.59) (0.59)
***
Log(market capitalization) (t - 1) 1.3256 1.2062*** 0.9565 ***
1.0194*** 0.7748 ***
0.3868*** 0.6245 ***
0.4352***
(5.95) (12.26) (3.47) (5.61) (4.28) (6.12) (6.68) (9.80)
Market to book ratio (t - 1) -0.0136 0.1101** -0.0272 -0.0918 0.0089 0.2549*** 0.0435 0.1498***
(-0.22) (2.09) (-0.40) (-1.58) (0.10) (3.46) (1.31) (6.00)
*
Log(firm age) (t - 1) -0.4686 -0.4732*** 4.1100 *
1.2021 -0.2142 -0.1688* -0.3796 ***
-0.0275
(-1.77) (-2.97) (1.71) (0.73) (-1.41) (-1.86) (-3.30) (-0.32)
Dividend yield (t - 1) -0.1165 0.0516 0.0453 0.0641** -0.1423** -0.0566 -0.0243 -0.0346**

38
 (-1.55) (1.59) (0.94) (1.98) (-1.96) (-1.09) (-0.88) (-2.19)
Leverage (t - 1) 1.2744 -0.7344 -0.7467 -1.7031* -0.3263 -1.0487*** -0.0148 -0.4930**
(1.53) (-1.64) (-0.72) (-1.77) (-0.56) (-3.30) (-0.04) (-2.37)
Log(number of analysts) (t - 1) 2.0316*** 3.2537*** 1.0210** 2.1010*** 0.5814 1.6536*** 0.5953*** 1.0768***
(4.29) (16.30) (2.33) (7.94) (1.40) (8.61) (3.18) (11.99)
Percent closely held (t - 1) 0.0043 -0.0147*** -0.0123 0.0056 -0.0122 -0.0116*** -0.0075* -0.0087***
(0.41) (-3.50) (-1.49) (1.07) (-1.18) (-2.67) (-1.93) (-4.56)
Foreign Sales (t - 1) 0.0319*** 0.0250*** -0.0024 -0.0018 0.0083 0.0119*** 0.0074* 0.0044**
(3.76) (5.07) (-0.25) (-0.23) (1.25) (3.31) (1.83) (2.01)
Market Cap/GDP (t-1) -0.0053 -0.0008 0.0003 0.0055 0.0022 0.0024 0.0107*** 0.0022
(-0.54) (-0.17) (0.03) (1.30) (0.48) (1.26) (3.06) (1.35)
Log(GDP per capita) (t - 1) 17.6574* -6.2712** 11.1515 -2.1853 -0.9548 0.3223*** -3.7517*** 0.0864
(1.68) (-2.28) (1.21) (-0.59) (-0.83) (4.74) (-3.12) (1.58)
Foreign Ownership (t - 1) 0.6879*** 0.7213*** 0.7902*** 0.8028***
(13.37) (26.96) (45.79) (91.00)
Constant -191.73* 38.71 -122.62 9.11 7.74 -4.55*** 35.95*** -2.80***
(-1.70) (1.39) (-1.32) (0.25) (0.67) (-5.69) (2.90) (-3.18)
Observations 9,311 33,680 9,315 33,721 7,972 22,887 9,311 33,680
R-squared 0.215 0.311 0.127 0.186 0.644 0.693
Cragg-Donald Wald F Statistic 733.66 1365.04
AR(2) 0.40 0.31
Hansen J Statistic 0.35 0.11 0.13 0.97
Difference Hansen J statistic 0.19 0.98

39
Table 7
The effect of board independence on U.S. versus non-U.S. foreign ownership.
This table presents the results from the regression of foreign investing in firms from 2001 to 2011, separated into U.S. versus non-U.S. investment in
foreign firms. The dependent variable is the sum of the shares held by foreign investors as a percentage of the firms total shares outstanding. Board
independence is the number of independent board members divided by the total number of directors on the companys board. All other variables are as
described in Table 1. Four regression methodologies are reported: ordinary least squares, firm fixed effects, dynamic GMM and two-stage least squares.
All standard errors are clustered by firm and all regressions (except OLS) include firm fixed effects. All regressions also include year fixed effects. *, **,
and *** represent significance at the 10%, 5% and 1% levels respectively.
US Ownership Non-US Ownership
Fixed Dynamic Fixed Dynamic
VARIABLES OLS Effects GMM IV-2SLS OLS Effects GMM IV-2SLS
*** *** *** *** *** * ***
Board independence (t - 1) 1.0959 1.0991 1.8318 2.7558 1.3639 0.5183 1.4880 0.3111
(4.73) (3.67) (10.94) (9.66) (3.70) (1.85) (8.42) (0.75)
**
Log(board size) (t - 1) 0.0172 -0.0481 0.0624 -0.0670 0.0499 -0.1589 -0.0381 -0.0166
(0.24) (-0.47) (1.06) (-2.25) (0.41) (-1.14) (-0.42) (-0.34)
Dual board structure (t - 1) -1.9729*** -2.1736*** -2.1854*** -2.2127*** -0.9542 -0.4910 -0.7264*** 0.6309**
(-5.85) (-5.01) (-9.78) (-11.02) (-1.59) (-0.67) (-2.71) (2.04)
CEO = Chair of Board (t - 1) 0.1939 -0.4302** -0.0774 0.3449*** -0.2663 -0.0120 -0.1005 -0.2768*
(0.85) (-2.18) (-0.52) (3.51) (-0.90) (-0.03) (-0.39) (-1.87)
*** *** *** *** *** ***
IFRS reporting (t - 1) 1.2426 1.3170 -0.1283 -0.2497 2.8346 1.8795 1.0556 0.8955***
(6.62) (6.35) (-1.44) (-3.88) (10.14) (6.27) (5.97) (8.80)
*** ** *** ***
US listing (t - 1) 4.6950 -1.9433 2.4772 1.8057 -0.2354 -1.4305 0.1265 -0.5255**
(6.39) (-2.15) (5.11) (5.45) (-0.43) (-1.25) (0.31) (-2.21)
*** ** *** ***
Included in a market index (t-1) 0.8442 0.6682* 0.6038 0.2819 -0.1344 0.5509 0.2166 0.1601
(4.97) (3.07) (4.83) (3.88) (-0.50) (1.63) (1.11) (1.42)
Big N auditor (t - 1) 0.5689*** 0.1558 0.2326*** 0.0806* 1.0437*** -0.0467 0.2322* 0.1337*
(5.73) (1.00) (3.23) (1.79) (6.31) (-0.15) (1.74) (1.78)
Log(market capitalization) (t - 1) 0.5121*** 0.3924*** 0.2340*** 0.2567*** 0.7216*** 0.5358*** 0.2453*** 0.1744***
(12.59) (5.10) (7.40) (13.76) (9.47) (4.60) (5.21) (6.26)
*** * *
Market to book ratio (t - 1) 0.0124 -0.0264 0.0414 0.0293 0.0643 -0.0347 0.0926 0.0782***
(0.66) (-0.96) (1.42) (2.66) (1.78) (-1.03) (1.93) (4.76)
*** *** **
Log(firm age) (t - 1) -0.1932 1.1099 -0.1097 0.0254 -0.2432 1.4946 -0.0938 -0.1903***
(-2.93) (1.52) (-2.70) (0.75) (-2.19) (1.54) (-1.50) (-3.44)
*** *** ***
Dividend yield (t - 1) -0.0088 0.0282 -0.0790 -0.0196 0.0276 0.0300 -0.0044 -0.0139
(-0.70) (2.61) (-4.04) (-3.05) (1.07) (1.27) (-0.12) (-1.19)

40
Leverage (t - 1) -0.3835* -0.4174 -0.4484*** -0.1065 0.2503 -0.9453* -0.0253 -0.2119
(-1.92) (-1.12) (-3.10) (-1.11) (0.79) (-1.65) (-0.12) (-1.44)
Log(number of analysts) (t - 1) 1.8011*** 0.8679*** 0.9000*** 0.5515*** 1.1521*** 0.8754*** 0.6454*** 0.5078***
(21.23) (7.08) (8.00) (12.93) (7.17) (5.02) (5.11) (8.26)
Percent closely held (t - 1) -0.0145*** 0.0025 -0.0114*** -0.0089*** 0.0057 -0.0013 0.0028 0.0008
(-9.25) (1.36) (-6.25) (-11.26) (1.59) (-0.35) (0.75) (0.56)
Foreign Sales (t - 1) 0.0183*** 0.0025 0.0101*** 0.0047*** 0.0091*** -0.0030 0.0051** 0.0040***
(8.12) (0.86) (5.40) (4.58) (2.65) (-0.58) (2.00) (2.65)
Market Cap/GDP (t-1) -0.0015 0.0009 -0.0011* -0.0021*** -0.0002 0.0037 0.0045*** 0.0058***
(-1.10) (0.72) (-1.71) (-4.04) (-0.05) (1.10) (2.69) (4.77)
Log(GDP per capita) (t - 1) -4.0494*** -2.4067** 0.1416*** 0.0655*** -1.2279 0.9578 -0.0256 0.0027
(-4.57) (-2.12) (4.51) (3.13) (-0.52) (0.32) (-0.46) (0.07)
Foreign Ownership (t - 1) 0.6345*** 0.7752*** 0.6851*** 0.7942***
(14.98) (55.53) (21.09) (79.21)
Constant 28.81*** 16.01 -1.74*** -2.39*** -2.82 -17.84 -1.30** -0.40
(3.24) (1.43) (-5.02) (-5.83) (-0.12) (-0.61) (-2.04) (-0.57)
Observations 43,225 43,270 31,078 43,225 43,225 43,270 31,078 43,225
R-squared 0.290 0.136 0.659 0.163 0.088 0.611
Cragg-Donald Wald F Statistic 2379.28 2555.34
AR(2) 0.12 0.16
Hansen J Statistic 0.20 0.14 0.91 0.16
Difference Hansen J statistic 0.63 0.65

41
Table 8
The effect of board independence on foreign institutional versus foreign non-institutional ownership.
This table presents the results from the regression of foreign investing in firms from 2001 to 2011, separated into institutional owners vs. other non-
institutional owners. The dependent variable is the sum of the shares held by foreign investors as a percentage of the firms total shares outstanding.
Board independence is the number of independent board members divided by the total number of directors on the companys board. All other variables
are as described in Table 1. Four regression methodologies are reported: ordinary least squares, firm fixed effects, dynamic GMM and two-stage least
squares. All standard errors are clustered by firm and all regressions (except OLS) include firm fixed effects. All regressions also include year fixed
effects. *, **, and *** represent significance at the 10%, 5% and 1% levels respectively.
Institutional Owners Others (Family, govt, etc.)
Fixed Dynamic Fixed Dynamic
VARIABLES OLS Effects GMM IV-2SLS OLS Effects GMM IV-2SLS
*** * *** ***
Board independence (t - 1) 2.0562 1.3358 3.3929 3.2883 0.1407 0.1354 -0.0193 -0.3523
(5.45) (1.73) (13.96) (7.45) (0.49) (0.42) (-0.13) (-0.94)
***
Log(board size) (t - 1) 0.0523 -0.2246 -0.0426 -0.1348 0.0709 0.0519 0.1576 0.0388
(0.46) (-1.49) (-0.38) (-2.90) (0.68) (0.50) (1.39) (0.87)
Dual board structure (t - 1) -2.6521*** -2.6394*** -3.3527*** -2.6724*** 0.6317 0.1880 0.8121*** 0.7450***
(-4.58) (-3.98) (-11.53) (-8.59) (1.20) (0.36) (2.86) (2.78)
CEO = Chair of Board (t - 1) 0.1066 -0.1580 -0.4222 0.1214 0.1733 0.6123* 0.2595 -0.0252
(0.36) (-0.43) (-1.48) (0.80) (0.73) (1.76) (0.89) (-0.20)
*** *** *** *** ***
IFRS reporting (t - 1) 3.6295 2.8138 0.1962 0.2865 0.6203 0.2136 0.6117 0.3253***
(13.12) (8.43) (1.02) (2.99) (2.81) (1.06) (3.30) (3.71)
*** ** *** *** *
US listing (t - 1) 5.0320 -3.3198 2.5219 1.8441 0.7205 0.3539 0.5407 0.1270
(5.44) (-2.35) (4.62) (4.74) (1.57) (0.21) (1.79) (0.51)
*** *** *** ***
Included in a market index (t-1) 1.2790 1.5697 0.9731 0.4225 -0.2413 0.1826 0.0686 0.1632
(5.04) (4.01) (3.60) (3.74) (-1.05) (0.63) (0.31) (1.62)
Big N auditor (t - 1) 1.1109*** 0.0449 0.3539*** 0.1641** 0.5870*** 0.0240 0.4200*** 0.0803
(7.24) (0.18) (2.59) (2.29) (4.53) (0.10) (2.80) (1.26)
Log(market capitalization) (t - 1) 0.7044*** 0.9636*** 0.3524*** 0.3558*** 0.5156*** 0.0569 0.2496*** 0.1129***
(11.55) (8.28) (5.54) (12.95) (7.83) (0.71) (3.81) (4.38)
** * *** ** **
Market to book ratio (t - 1) 0.0147 -0.0703 0.1380 0.0810 0.0755 -0.0016 0.1521 0.0439***
(0.54) (-2.10) (1.73) (4.63) (2.36) (-0.06) (2.23) (2.88)
*** * *
Log(firm age) (t - 1) -0.3171 1.9711 -0.0696 -0.0896 -0.1257 0.3303 -0.0404 -0.0622
(-3.01) (1.85) (-1.04) (-1.67) (-1.42) (0.53) (-0.65) (-1.30)
*** * ***
Dividend yield (t - 1) -0.0011 0.0488 -0.1241 -0.0419 0.0105 0.0118 -0.0885 -0.0065
(-0.05) (2.61) (-1.83) (-4.09) (0.50) (0.60) (-1.52) (-0.61)

42
Leverage (t - 1) -0.2644 -0.9782 -0.5829** -0.0478 0.1152 -0.4692 0.1554 -0.2502**
(-0.88) (-1.63) (-2.16) (-0.32) (0.45) (-1.23) (0.70) (-2.11)
Log(number of analysts) (t - 1) 3.3597*** 1.3893*** 1.3340*** 1.1062*** -0.2556* 0.2477* -0.1471 0.0635
(26.87) (7.36) (8.18) (17.47) (-1.86) (1.77) (-0.98) (1.18)
Percent closely held (t - 1) -0.0279*** 0.0001 -0.0288*** -0.0149*** 0.0154*** 0.0036 0.0171*** 0.0055***
(-11.16) (0.05) (-6.24) (-11.27) (4.91) (1.10) (3.38) (4.08)
Foreign Sales (t - 1) 0.0271*** 0.0015 0.0134*** 0.0076*** 0.0006 -0.0054 0.0016 0.0019
(8.28) (0.29) (3.93) (4.81) (0.20) (-1.34) (0.60) (1.46)
Market Cap/GDP (t-1) -0.0005 0.0014 -0.0000 0.0005 0.0037 0.0065** 0.0052*** 0.0032***
(-0.16) (0.50) (-0.01) (0.56) (1.04) (2.20) (2.74) (2.85)
Log(GDP per capita) (t - 1) -4.6571*** 0.0226 0.1085** 0.1005*** -3.3811 -4.2633 -0.1863*** -0.0662*
(-3.33) (0.01) (2.21) (3.30) (-1.54) (-1.53) (-2.81) (-1.77)
Foreign Ownership (t - 1) 0.7341*** 0.7751*** 0.4914*** 0.7557***
(38.03) (89.84) (7.88) (45.24)
Constant 24.2248* -13.2021 -2.6287*** -3.6517*** 30.3101 40.1427 0.1784 0.8264
(1.71) (-0.77) (-4.28) (-4.93) (1.35) (1.48) (0.25) (1.20)
Observations 41,513 41,553 28,465 40,211 41,513 41,553 28,465 40,211
R-squared 0.371 0.193 0.690 0.058 0.011 0.531
Cragg-Donald Wald F Statistic 2178.28 2267.78
AR(2) 0.11 0.26
Hansen J Statistic 0.15 0.18 0.76 0.17
Difference Hansen J statistic 0.17 0.75

43
Table 9
The effect of board independence on varying categories of foreign institutional ownership.
This table presents the results from the regression of foreign investing in firms from 2001 to 2011, separated into various types of institutional owners.
The types of institutional owners include mutual funds, banks, insurance firms, private equity firms and other financial firms. Hedge funds, foundations
and venture capital funds are excluded due to small sample size. The dependent variable is the sum of the shares held by foreign institutional investors by
type of institution as a percentage of the firms total shares outstanding. Board independence is the number of independent board members divided by the
total number of directors on the companys board. All other variables are as described in Table 1. Regressions are estimated using dynamic GMM
though all four regression methodologies used in Table 5 have similar results. All standard errors are clustered by firm and all regressions include firm
fixed effects. All regressions also include year fixed effects. *, **, and *** represent significance at the 10%, 5% and 1% levels respectively.

VARIABLES Mutual Funds Banks Insurance Firms Private Equity Other Financial Firms
Board independence (t - 1) 0.4878*** 1.5261*** 0.5845*** 0.1736*** 0.7990***
(4.74) (12.37) (10.17) (4.37) (8.87)
Log(board size) (t - 1) 0.0259 -0.0649 -0.0408* -0.0021 -0.0420
(0.56) (-1.35) (-1.81) (-0.11) (-0.96)
Dual board structure (t - 1) -0.4597*** -1.4829*** -0.5551*** -0.1356*** -0.9581***
(-3.54) (-10.15) (-8.08) (-2.70) (-7.43)
CEO = Chair of Board (t - 1) -0.1322 -0.2815** 0.0877 0.1496* -0.0792
(-1.12) (-2.36) (1.23) (1.93) (-0.68)
IFRS reporting (t - 1) 0.1087 0.2005** 0.0909* -0.0205 -0.0206
(1.44) (2.42) (1.90) (-0.91) (-0.34)
US listing (t - 1) 1.8066*** 0.0367 0.0619 0.4891** 1.5943***
(4.04) (0.18) (0.60) (2.57) (6.13)
Included in a market index (t - 1) 0.1432 0.3103*** 0.1489** 0.0025 0.2310***
(1.39) (2.82) (2.31) (0.06) (2.64)
Big N auditor (t - 1) 0.1503** 0.1154* 0.0846*** 0.0269 0.0175
(2.57) (1.82) (2.73) (0.97) (0.32)
Log(market capitalization) (t - 1) 0.0403* 0.1191*** 0.0754*** 0.0091 0.0876***
(1.73) (5.19) (6.26) (0.82) (3.96)
Market to book ratio (t - 1) 0.0133 0.0789*** -0.0050 -0.0106 -0.0024
(0.48) (3.13) (-0.52) (-1.05) (-0.11)
Log(firm age) (t - 1) -0.0208 -0.0506 -0.0076 -0.0275** -0.0502*
(-0.67) (-1.52) (-0.46) (-2.21) (-1.75)
Dividend yield (t - 1) -0.0299 -0.0258 0.0004 -0.0189** -0.0434***
(-1.58) (-1.39) (0.04) (-2.04) (-2.82)
Leverage (t - 1) -0.3138*** 0.1500 -0.1759*** 0.0163 -0.2467**

44
 (-2.67) (1.28) (-2.80) (0.29) (-2.22)
Log(number of analysts) (t - 1) 0.5865*** 0.5932*** 0.1337*** 0.0893*** 0.5546***
(7.81) (9.05) (3.92) (3.50) (9.54)
Percent closely held (t - 1) -0.0046*** -0.0169*** -0.0048*** -0.0019*** 0.0017
(-2.69) (-10.11) (-5.87) (-3.26) (0.95)
Foreign Sales (t - 1) 0.0055*** 0.0053*** 0.0011 0.0010* 0.0037***
(3.92) (3.67) (1.57) (1.70) (2.71)
Market Cap/GDP (t-1) 0.0013* -0.0001 -0.0007*** -0.0002 0.0011
(1.73) (-0.14) (-3.60) (-1.39) (1.39)
Log(GDP per capita) (t - 1) 0.0401* 0.0097 -0.0075 0.0048 0.1609***
(1.72) (0.41) (-0.70) (0.51) (6.99)
Foreign Ownership (t - 1) 0.5174*** 0.6805*** 0.7576*** 0.4218*** 0.6118***
(12.46) (30.94) (26.62) (4.29) (13.48)
Constant -0.5822** -0.7325*** -0.0108 0.0911 -1.8494***
(-2.02) (-2.61) (-0.10) (0.78) (-6.48)

Observations 28,465 28,465 28,465 21,012 28,465

AR(2) 0.81 0.12 0.12 0.45 0.12
Hansen J Statistic 0.70 0.19 0.20 0.50 0.34
Difference Hansen J statistic 0.27 0.29 0.17 0.96 0.12

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