Friendly boards and capital allocation efficiency

Abstract

This study examines the effect of friendly boards on capital allocation efficiency. We provide evidence that firms with friendly boards have a positive and statistically significant effect on capital allocation inefficiency. We find our results robust to different measures of friendly boards and capital allocation inefficiency, alternative model specifications, omitted variable bias, self‐selection bias and other endogeneity concerns. We also show that the positive association between friendly boards and capital allocation inefficiency is lower in firms with high external corporate governance quality but higher in firms with high financial constraints. The findings imply that poor board monitoring and high agency conflicts in firms with friendly boards lead to high capital allocation inefficiency.