How Much Do Directors Influence Firm Value?

Abstract

The value a director provides to a firm is empirically hard to establish. We estimate that value by exploiting the commonality in idiosyncratic returns of firms linked by a director and show that, on average, a single director's influence causes variation in firm value of almost 1% per year. The return commonality is not due to industry or other observable economic links. Variation in the availability of information on shared directors and a placebo test exploiting the timing of shared directors provide further identification. The results also imply that the directorial labor market does not fully assess directors in real time.

Keywords: director influence, connected boards, price discovery, economic links, return predictability, information diffusion, market efficiency, investor inattention, limits to arbitrage, lead-lag effect, networks, boards of directors

JEL Classification: G10, G12, G14, G30