Abstract:
This thesis investigates the impact of director prestige on firm performance,
value, and risk. The first essay, entitled, “Are prestigious directors mere
attractive ornaments on the corporate Christmas tree?”, examines the impact of
appointments of prestigious directors on both short- and long-term firm
performance. Using the UK’s unique institutional setting of Queen’s honours to
measure director prestige, I find that the market reacts positively to the
appointment announcements of Prestigious Award-Winning Directors (PAWDs).
Further, I show that firms appointing PAWDs show a significant improvement in
performance than firms appointing Non-Award-Winning Directors (NAWDs).
However, it is the first appointment of a PAWD to firms that are driving the
significance implying that there is no incremental value in appointing more than
one PAWD to the board. I attribute these findings to the monitoring, legitimacy,
and preferential access to resources roles of prestigious directors. My results
are robust to several checks controlling for endogeneity arising through omitted
variable bias and self-selection bias.
In the second essay, entitled, “Prestigious Directors, Firm Acquisitions,
Financial Policies and Risk”, I investigate the impact of prestigious directors on
the firm’s acquisition behaviour, financial policies such as cash holdings and net
leverage and its risk and valuation. I find that firms undertake less acquisitions,
especially, diversifying acquisitions, after appointing PAWDs. Moreover, they
increase their cash holdings after appointing PAWDs, and hence, their net
leverage decreases as firms need not borrow externally due to excess cash.
Finally, I find that the firm risk declines and the value increases after the
appointment of prestigious directors. I consider these findings to diligent
monitoring performed by prestigious directors that reduce managerial private
benefits.
Overall, my findings are consistent with both the Agency Theory and the
Resource Dependence Theory that suggest that prestige not only acts as an
incentive to effectively monitor management but also signals higher human and
social capital.