Re-Examining Board Reforms and Firm Value: Response to “How Much Should We Trust Staggered Differences-in-Differences Estimates?” by Baker, Larcker, and Wang (2021)

Using board reforms in 41 countries and staggered difference-in-differences (DiD) estimates, Fauver, Hung, Li, and Taboada (2017, FHLT) find that firm value increases following the reforms. In a study that reviews the recent econometric theory on staggered DiD estimations, Baker, Larcker, and Wang (2021, BLW) contest the robustness of FHLT’s results. They conclude that FHLT’s results become mostly insignificant using alternative approaches that address the biases suggested by this recent theory. However, we find that the insignificant findings in BLW’s analysis are largely due to selective modifications that BLW made to FHLT’s data and model specifications, which resulted in low power tests. Importantly, these changes, which were not transparently disclosed in BLW, largely explain the insignificant results reported in BLW, even before implementing the new econometric approaches. Thus, in this study, we perform a battery of tests that apply alternative approaches that address the biases suggested in this recent literature. In contrast to the conclusions in BLW, we find that FHLT’s results remain significant. Our findings reinforce the conclusion of FHLT that board reforms increase firm value and highlight the importance of fair data representation when applying modified staggered DiD methods.