CEOs versus the board: Implications of strained relations for stock liquidity

When board-CEO relations are strained, management may reduce cooperation with the board and impede the disclosure of relevant information. Because liquidity is a function of uncertainty, it will reflect board-CEO tensions. Using a sample of East Asia companies, we test this prediction by investigating the association between board composition and share liquidity. Although greater board independence generally increases liquidity, its impact is lower when board-management relations are plausibly strained, for example, when CEOs are subject to replacement. Its impact is also lower when CEOs have greater bargaining power. Patterns of accounting transparency are consistent with those we document for liquidity. The evidence thus suggests that board independence can be costly in some circumstances, with a net effect that depends on both the relationship between and the comparative negotiating strengths of the CEO and the board.