Learning About Directors

Abstract

This study investigates the importance of corporate boards by exploiting the predictions from a learning model in which capital markets process information and learn about the quality of incoming directors. The estimates suggest that upon the arrival of a new director, uncertainty about governance quality accounts for 9.5% of return volatility. The learning framework is useful to evaluate the importance of governance attributes and the kinds of directors that are more influential in which circumstances. For instance, women on boards are especially important at times when monitoring is necessary.

Keywords: Boards of Directors, Corporate Governance, Bayesian Learning, Director Turnover

JEL Classification: G30, G34, G39, M12, M51