Board Structure, Payout Policy, and Performance during the Crisis: An Unintended Consequence of the Sarbanes-Oxley Act and the Exchange Listing Rules

Non-compliant firms required to raise board independence by the 2003 NYSE and NASDAQ listing rules significantly increased their dividend payouts and held less cash reserves. As the crisis unfolded, they were more likely to reduce investment and ultimately under-performed compliant firms. The under-performance was more severe for non-compliant firms facing higher costs of external financing and those with greater growth opportunities. Our evidence suggests that regulations requiring independent boards facilitate higher dividends and thereby mitigate agency costs of free cash flow. However, they may also make firms more dependent on external financing and more susceptible to adverse external financing shocks.