Director Quality and Firm Performance

Authors


  • We thank James Ang and Allan Eberhart for valuable comments on earlier versions of this paper and Tom McAndrew for research assistance. All remaining errors and omissions are our own.

*The Sellinger School of Business and Management, Department of Finance, Loyola College in Maryland, 4501 N. Charles Street, Baltimore, MD 21210; Phone: (410) 617-5192; Fax: (410) 617-5035; E-mail: jli@loyola.edu

Abstract

Many financial economists argue that the board of directors' efficacy in the monitoring of managerial behavior depends upon the quality of the directors. Assuming that there is a link between the stock performance of target firms and the quality of their directors, we empirically categorize directors receiving additional directorships following a takeover as “above average” and “below average.” We then follow the stock performance of firms hiring new directors for three years after their hiring. We match the two categories of directors with the performance of hiring firms after a director's appointment. Accounting for other contemporaneous effects, we regress the hiring firms' post-performance on director quality and other attributes. The results indicate that directors of “above average” quality are related to hiring firms with “above average” post-performance.

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