Board structuring and firm performance

This dissertation studies the internal organization and structuring of corporate boards and how specific structures might affect functioning of boards and ultimately the financial performance of a firm. In the first essay I examine the committee structure and its role in reducing the cost of large boards. I explore the notion that investors value board size by examining both the costs and benefits of larger boards. More specifically, I argue that firms use board committees to mitigate the cost of larger boards. Using market-based measures of firm performance, I find that larger boards are associated with greater firm performance. This association is stronger when boards use a greater number of sub-committees. In further analysis, I find that board size is positively associated with firm productivity, and that poorly performing firms are more likely to add directors, and the likelihood of CEO dismissal is increasing with board size. Overall, the results suggest that the number of directors on the board enhances the board's monitoring capabilities and that firms mitigate costs associated with the large size by having the board committee structure.; The second essay examines why some firms choose to have heterogeneity among the directors. Social activists and government agencies seek greater heterogeneity on corporate boards, although its impact on firm performance is not clear. I explore the potential financial impacts of director-heterogeneity and present a simple model showing how director-heterogeneity affects the advisory and monitoring roles of the board. Consistent with the predictions of the model, I find that director-heterogeneity is associated with greater advertising intensity, growth opportunities and corporate complexity. Director-heterogeneity is also positively associated with industry-adjusted Tobin's Q and firm-profitability. Furthermore, the importance of director heterogeneity to outside investors is increasing in CEO Ownership, CEO Tenure, and the presence of anti-takeover provisions. Overall, the empirical evidence implies that ethnic and gender diversity on the board of directors improves firm performance by augmenting the board's advising and monitoring functions.; In the third essay I examine the impact of director heterogeneity on the monitoring effectiveness of corporate boards. It has been argued and reported that good governance mechanisms improve corporate information environment and lower information asymmetries between outsiders and managers. I find that greater heterogeneity among corporate directors is associated with better corporate information environment. To test this association, an opacity index is created from analysts' following, analysts' forecast error, bid---ask spread and stock turnover. I find a strong negative association between director heterogeneity and corporate opacity. Furthermore, I also document evidence that next period's cost of capital is negatively associated with director heterogeneity. This discount in cost of capital appears to be larger for firms where good governance mechanisms are really desirable, i.e. the firms that face greater information opacity.