Do Individual Directors Matter? Evidence of Director-Specific Quality

Abstract

We create a new measure called director-specific quality (DSQ) that captures the collection of value-relevant transferable attributes unique to a director and explains 10% of the variation in firm value. Directors with higher DSQ receive greater voter support, and investors respond more (less) favorably when they are appointed (die). Boards with higher DSQ make more value-increasing M&A deals, tie CEO compensation more closely to performance, produce more and higher quality innovation, and manage cash better. Difference-in-differences analyses exploiting director deaths confirm these effects. During the COVID-19 pandemic, firms with higher board-level DSQ also experienced relatively higher stock returns. Overall, our results suggest that directors have unique value-relevant attributes, and who firms hire matters.

Keywords: Board of Directors, Director Quality, Firm Value

JEL Classification: G14, G30, G32, G34