Essays on boards of directors

Abstract

This thesis consists of three self-contained essays on corporate boards of directors. In the first essay, I examine the effect of overconfident CEO directors on corporate innovation and find that such directors are significantly associated with not only greater innovation input as measured by R&D intensity, but also better innovation output as measured by the number of successful patents and the number of patent citations. I further find that such directors are also associated with increased firm performance. Thus, this essay sheds new light on the puzzle of why firms are willing to appoint CEO directors despite their non-positive impacts on board monitoring and provides an answer from the perspective of board advising: overconfident CEO directors provide advice and counsel to the CEOs which are valuable for corporate innovation. In the second essay, I investigate the implication of independent directors’ multi-industry experience (IDMIE) for firm value. I find that a higher degree of IDMIE is consistently and robustly related to a higher firm value. I further examine channels through which IDMIE can potentially affect firm value. I find that IDMIE has a positive effect on corporate innovation. A higher degree of IDMIE increases a firm’s R&D intensity, the number of patents, and the citation of the patents. Overall, the evidence is consistent with the hypothesis that IDMIE enhances independent directors’ ability to perform their duties, and therefore provides important policy implications for the design of corporate boards. In the third essay, I use the independent board requirements mandated by new NYSE and NASDAQ listing rules following Sarbanes-Oxley Act (SOX) as an exogenous shock to estimate how board independence affects the variability of firm performance. Using a difference-in-difference approach, I find that treatment firms observe larger decrease in the variability of firm performance after SOX than control firms. The evidence is consistent with the hypothesis that the increased independence weakens the CEO power over the board and thus decisions made by a more independent board are less extreme, resulting in less variability of firm performance.