Nonexecutive director influence on informational asymmetries in Caribbean offshore financial centers

• Published date: 01 March 2023
• Author: Bruce Hearn,Alexander Mohr,Jaskaran Kaur,Muhammad Khawar
• Date: 01 March 2023
• DOI: http://doi.org/10.1111/corg.12453

ORIGINAL ARTICLE

Nonexecutive director influence on informational asymmetries

in Caribbean offshore financial centers

Bruce Hearn

1,2

| Alexander Mohr

3

| Jaskaran Kaur

1

| Muhammad Khawar

1

1

School of Management, Bright Building,

University of Bradford, Bradford, UK

2

University of Southampton, Southampton,

UK

3

Vienna University of Economics and Business,

Vienna, Austria

Correspondence

Bruce Hearn, School of Management, Bright

Building, University of Bradford, Bradford,

Yorkshire, UK.

Email: b.hearn@bradford.ac.uk

Abstract

Question/issue: This is a study of therelationship between nonexecutive director per-

sonal ownership and firm's bid ask spreads in listed firms from across the Caribbean

offshore securities exchanges.

Research findings/insights: We report that bid ask spreads increase with non-

executive ownership. However, this result is reduced (negatively moderated) in the

context of higher formal institutional quality and also if the territory has a fixed

exchange rate regime but exacerbated (positively moderated) if the firm is located

within an offshore jurisdiction.

Theoretical/academic implications: The results regarding the influence of non-

executive director ownership on firm liquidity-based transaction costs, namely, mar-

ket estimates of bid ask spreads, are interpreted in terms of the contingency of this

relationship on the wider institutional context. The effectiveness of nonexecutive

directors is highly contingent upon the specific institutional context. Higher formal

institutional quality and the presence of a strong macroeconomic tie between terri-

tory and Organisation for Economic Co-operation and Development (OECD) country

lead to a reduction in these costs, while offshore financial centers lead to their

increase. We argue that this highlights a shortcoming of agency theory's more limited

view of institutions.

Practitioner/policy implications: The results support regulator's focus on board of

director composition and in particular nonexecutive remuneration in the form of

ownership. Given the increasing dominance of Anglo-American governance, firms

worldwide are increasing the proportions of nonexecutive directors on their boards.

However, their role is acutely context specific which is reflected in the relationship

between their personal ownership and the liquidity-borne transaction costs of the

firm as a whole.

KEYWORDS

board-level governance outcomes, board reputation/legitimacy, director independence,

governance environments, multi-country

Received: 26 July 2021 Revised: 8 April 2022 Accepted: 11 April 2022

DOI: 10.1111/corg.12453

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium,

provided the original work is properly cited.

© 2022 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd.

Corp Govern Int Rev. 2023;31:349–369. wileyonlinelibrary.com/journal/corg 349

1|INTRODUCTION

Over the last two decades, there has been a phenomenal increase in

the worldwide use of offshore tax havens (Damgaard et al., 2018).

Offshore tax havens are characterized by their geographical smallness

(Cobb, 2001). This smallness is associated with dense social networks

and a dominance of a small numbers of extended families (Allred

et al., 2017; Fichtner, 2016; Hines, 2010) whose conservatism forms

the cultural foundations (Fichtner, 2016) of the opacity of these off-

shore tax havens (Hines, 2010; Suss et al., 2002). Surprisingly, there is

no prior research on the corporate governance of firms' boards of

directors within such opaque contexts, even though they provide a

unique opportunity to uncover the institutional determinants of off-

shore secrecy. The lack of research is of concern given the importance

of the monitoring and disciplining function of nonexecutive directors

within good governance (Donnelly & Mulcahy, 2008; Zattoni &

Cuomo, 2010) that is embedded in most corporate governance legisla-

tion and recommendations worldwide (Aguilera, 2005; Nowak &

McCabe, 2003). In this paper, we theoretically and empirically explore

how nonexecutive directors' personal ownership influences firm-level

informational asymmetries in offshore tax havens and how the

strength of this effect is influenced by variations in the macro-

institutional environments in these offshore tax havens.

Theoretically, we develop a novel institution-theoretic approach

that accommodates consideration of the dense overlapping social net-

works in offshore tax havens, such as the isolated and predominantly

island economies of the Caribbean (Cobb, 2001; Hines, 2010). Our

novel approach addresses the shortfall in traditional agency-theoretic

approaches that regard institutions merely as a “thin veil”enforcing

contractual terms (Aguilera & Jackson, 2003) and do not consider the

richness of the institutional wider environment. The smallness of off-

shore tax havens leads to extended familial institutions seamlessly

transcending both firms and state architecture increasing the impor-

tance of the social status and relational capital that nonexecutive

directors derive from dense social interconnectedness (Hines, 2010;

Miller et al., 2013). The importance of their social networks and of

their underlying extended familial allegiances underscores the contex-

tual embeddedness of nonexecutive directors. Thus, the role of non-

executive directors as impartial monitors of executive directors, as

envisaged by international investment norms of “good governance”

(Aguilera & Jackson, 2003), is superseded by the need for legitimacy

in the offshore tax haven. Therefore, we argue that while firms and

their directors are subject to North's (1991)“rules of the game,”their

behavior is also subject to a dynamic interplay between firms and the

social fabric in the form of external constituencies, within which non-

executive directors are embedded. We thus investigate how non-

executive directors' personal ownership shapes the information

asymmetries. Hence, our first contribution is our focus on a largely

ignored yet critical aspect of nonexecutive compensation, namely,

their personal ownership, and linking this to the informational asym-

metry between a firm and its external minority owners. Our institu-

tional approach adopts a socialized view that marks a substantial

departure from agency theory's singular emphasis on nonexecutive

impartiality in monitoring and disciplining often powerful insiders

(e.g., Jensen & Meckling, 1976). Following Roberts et al. (2005), we

argue that agency theory fails to consider the socialized, collaborative

side of nonexecutive directors' roles, which, for instance, include their

close interaction with executives through activities, such as men-

toring, leadership counseling, experience-based advice, and involve-

ment in and evaluation of strategic decisions. Such socialized

collaboration is a particularly prominent issue in offshore tax havens,

where nonexecutive directors' social capital constitutes a critical

resource for their firms through their mutual interconnectedness with

external constituencies (Nahapiet & Ghoshal, 1998), which are pre-

dominantly families.

Further, we suggest that this effect is contingent on the wider

institutional context. We thus explore how various dimensions of the

institutional environment in offshore tax havens influence the associa-

tion between nonexecutive director ownership and informational

asymmetry. We consider how well formal institutional frameworks

protect the property rights of outside minority investors in the con-

text of external contracting. To do this, we utilize formal institutional

quality, which is a national aggregate of the six Worldwide Gover-

nance Indicator (WGI) measures (Kaufman et al., 2009) that form the

underlying dimensions of institutional quality. We then undertake a

fine-grained analysis of formal institutions by considering, first,

whether their offshore jurisdictions have retained European colonial

status and, second, whether a fixed currency regime, such as the US$,

is maintained with their major trading partners. Former European col-

onies benefit significantly from unhindered and costless access to first

world, developed institutional architecture paired with local discre-

tion, derived from their relative autonomy, in selectively assimilating

this architecture within local societal frameworks (Cobb, 2001;

Hines, 2010). Furthermore, they benefit from considerable political

support of the European metropole when negotiating taxation treatise

and obtaining international recognition (Fichtner, 2016). These bene-

fits underscore the competitive advantages of colonies as offshore

jurisdictions. In contrast, territories with fixed currency regimes must

themselves absorb the costs of tying their institutional frameworks

with those of currency partner countries and lack the political support

and enhanced recognition provided by a European metropole

(Cobb, 2001; Hines, 2010). These two institutional contingencies

result in considerable differences in national institutional frameworks

and are fundamental to the design of offshore institutional frame-

works. Analyzing these contingencies will provide deeper insights into

the impact of nonexecutive directors on firms' informational

asymmetries.

2|THEORY AND HYPOTHESES

We draw on institutional theory to theorize about the effect of non-

executive director ownership on the informational asymmetry costs

between managerial insiders and outside minority investors in the

unique context of offshore tax havens. The starting point of our theo-

rization is the specific geography of territories. We argue that the

350 HEARN ET AL.