The impact of board characteristics on corporate investment decisions: an empirical study

• DOI: https://doi.org/10.1108/CG-04-2020-0125
• Published date: 06 January 2021
• Date: 06 January 2021
• Pages: 569-586
• Subject Matter: Strategy,Corporate governance
• Author: Ben Kwame Agyei-Mensah

The impact of board characteristics on

corporate investment decisions: an

empirical study

Ben Kwame Agyei-Mensah

Abstract

Purpose –The purpose of this study is to investigate the influence of board characteristics on firms’

investmentdecisions.

Design Methodology Approach –The study used data sourced from annualreports of firms listed on

the Ghana Stock Exchange from 2014 to 2018. Descriptive analysis was performed to provide the

background statisticsof the variables examined. This wasfollowed by a regression analysis which forms

the maindata analysis.

Findings –The multiple regression analysis results indicated that the proportion of independent

directors and financial experts on the board are negatively related to firm investment. These findings

imply that independent directors and financial experts on the board can help firms reduce

overinvestmentand improve investment efficiency.

Originality Value –The extant literatureshows that the board of directorsare an effective mechanism to

reduce agency problems in firm decisions and operating performance. However, there has been little

researchon the role of the board of directors in corporate investmentpolicy.

Keywords Investment, Board of directors, Corporate governance, Board characteristics, Ghana

Paper type Research paper

1. Introduction

The purpose of this study is to investigate the influence of board characteristics on firms’

investment decisions. Thestudy investigates whether effective corporate boards are related

to investment efficiency in publiclytraded firms in Ghana, during the period 2014-2018.

There is a belief that effective corporate governance can mitigate the agency problem and

hence, lead to stronger investment performance (Bushman and Smith, 2003). Chen et al. (2011)

also posit that strong and effective corporate governance influence better and effective

investment decisions and indirectly increases firm value. Gill et al. (2012) confirmed the assertion

by stating that good corporate governance is necessary for firms to make sound investment

decisions which, in turn, help firms to prosper in the domestic and in the global market.

The corporate board of directors plays integral and vital roles in every organization. Kim

et al. (2009) argue that boards are in a primeposition to contribute to the strategic decision-

making process. Board of directors are electedby shareholders at annual general meetings

to oversee the activities of a company and one of their roles is approving strategic

decisions, including corporate investment decisions. It is the responsibility of the board of

directors to see to the efficient and effective management of the finances of an organization

to achieve the objectives of that organization. Though corporate finance theory states that

finance managers are responsible for a company’s investment decisions, advising on the

allocation of funds in terms of the totalamount of assets, the composition of non-current and

Ben Kwame Agyei-Mensah

is based at the Department

of Finance and Accounting,

Solbridge International

School of Business,

Daejeon, Republic of

Korea.

JEL classif‌ication –G3, M1, M2,

M4

Received 5 April 2020

Revised 22 May 2020

29 September 2020

15 November 2020

Accepted 17 November 2020

This research work has been

carried out based on the

support of Woosong

University’s Academic

Research Funding in 2020.

DOI 10.1108/CG-04-2020-0125 VOL. 21 NO. 4 2021, pp. 569-586, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 569

current assets, and the consequent risk profile of the choices (Watson and Head, 2010).

The ultimate responsibility for the well-beingof the company rest with the board of directors.

This argument is supported by Aguileraet al. (2015), who posit that the board of directors is

one of the primary internal corporate governance mechanisms. Besides, sound financial

management and capital investment decision-making are critical to survival and long-term

success for firms (Bennouna et al.,2010).

Recently, studies about investment decisions have proliferated, Ruiz-Porras and Lopez-Mateo

(2011) examined the relationship between the corporate governance and corporate investment

decisions in Mexican manufacturing firms; Ariful et al. (2015),Khan et al. (2015) and Malkiel

(2003) examined investment decisions by considering economic aspects; Edusei-Mensah

(2015),Mutswenje and Jagongo (2014),Bokpin and Onumah (2009) and Ninh et al. (2007)

conducted studies to identify the determinants of i nvestment decisions; others Awais et al.

(2016),Talal et al. (2016) and Hoang and Nguyen (2014) have carried out analyses taking into

account socio-demographic or psychological factors in line with thebehavioural finance theory.

Giroud and Mueller (2011) identified firms’ investment activities by their capital expenditures

and acquisitions. However, as far as the researcher is concerned no prior study has

investigated the link between the board of directors, an important corporate governance

mechanism, and corporate investment decisio ns in firms listed on the Ghana Stock Exchange

(GSE). Firm investment decisions do not only hel p improve the performance of firms but also

the economic development of various countries. Allen (2005, p. 175) claims that “ensuring that

emerging economies have effective legal systems and ins titutions is neither necessary nor

sufficient for ensuring good economic performance”. Hence, there is a need for a study into the

influence of board characteristics on investment decisions in firms listed on the GSE. This study

is thus set to bridge the research gap. With firms responding positivelyto the government’s one

district one factory (1D1F) agenda by expanding existing firms and establishing new ones,

there is the need to study how effective board influence these investment decisions.

Under the 1D1F agenda, the government of Ghana is fu nding high growth businesses in the

strategic sectors of the Ghanaian economy. It is a policy aimed at improving the manufacturing

base and helping to create more jobs for the unemployed youth in the 276 districts.

The study used longitudinal data (2014 to 2018) of 150 firm-years reports of firms listed on

the GSE. The study found that the proportion of independent directors and financial experts

on the board are negatively related to firm investment. These findings imply that

independent directors and financial experts on the board can help firms reduce

overinvestment and improve investment efficiency. This study provides an indicator to

shareholders and other investors that a company with a strong governance structure will

likely make a better investmentdecision.

This study is original, as it focuses on the direct relationship between corporategovernance

mechanism and firm investment efficiency level that is scarce in the literature, with a special

focus on an emerging market in the process of developing their best governance practices.

Also, the study will be adding more information to existing research, as there is a dearth of

research in this area.

The remainder of this paper is organized as follows. Section 2 describes literature review

and hypotheses development. Section 3 explains research methodology while results and

discussion are presented in Section4. Section 5 summarizes the conclusion of this study.

2. Literature review and hypotheses development

2.1 Corporate governance in Ghana

The regulatory framework for an effective corporate governance practice in Ghana is

contained in the Companies Act, 2019 (Act 992), Securities Industry Law 1993 (PNDCL

333) as revised by the Securities Industry (Amendment) Act, 2000 (Act 590) and the listing

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