The Investment Opportunity Set and the Voluntary Use of Outside Directors : New Zealand Evidence

This study examines whether the composition of boards of directors differs between high and low growth firms. Based on prior research, we hypothesise that firms with greater investment opportunities require more monitoring because managers in these firms have more discretion both in selecting investments and allocating resources between investments. Because outside directors can be more effective monitors than inside directors, we predict that outsiders will make-up a larger proportion of the board in high growth firms than in low growth firms. Using a cross-sectional sample of 77 New Zealand firms, our results suggest that the percentage of outside directors is related to growth for two of the three measures of investment opportunities which we employ. As expected, the percentage of outside directors is also related to a composite measure of investment opportunities