Does Superior Firm Performance Lead to Higher Quality Outside Directorships?

ACCOUNTING AUDITING AND ACCOUNTABILITY JOURNAL, 21 (7), pp. 907-932, 2008

41 Pages Posted: 13 Jun 2013

See all articles by Aditi Gupta

Aditi Gupta

King's Business School

Steven Young

Lancaster University - Department of Accounting and Finance

David Otley

Lancaster University

Date Written: 2008

Abstract

Purpose – Holding the number of outside directorships constant, this paper tests whether executive directors from superior performing firms are subsequently rewarded with better quality outside directorships.

Design/methodology/approach – The quality of new outside directorship appointments is modelled using a two-step Heckman selection procedure to control for the probability of acquiring a new outside board seat. Outside directorship quality is estimated using an index formed from series of observable firm-specific characteristics proxying for the following three latent aspects of quality: prestige, reputational risk and monetary rewards. Our index aggregates across these three dimensions to produce an overall quality score, with higher scores signifying higher quality directorships.

Findings – Tests based on a sample of UK executive directors who subsequently acquire at least one new outside board seat show that the quality of newly acquired outside directorships is positively related to past and contemporaneous performance at the executive’s own firm. Recent past performance appears to be a more important determinant of the quality of outside directorships than long-run performance reputations. However, effects are largely confined to executives that either switch between boards or enter the outside directorship market for the first time.

Research limitations/implications – Findings support the view that the market for outside directorships operates (at least in part) as a meritocracy by rewarding executives from superior performing firms with better quality outside board appointments.

Originality/value – Prior work on the market for outside directorships focuses on explaining cross-sectional variation in the number of outside board seats held. Our paper is this first to measure and model directorship quality.

Keywords: Directorial Labour Markets, Director Reputation, Outside Directorships

Suggested Citation

Gupta, Aditi and Young, Steven and Otley, David T., Does Superior Firm Performance Lead to Higher Quality Outside Directorships? (2008). ACCOUNTING AUDITING AND ACCOUNTABILITY JOURNAL, 21 (7), pp. 907-932, 2008, Available at SSRN: https://ssrn.com/abstract=1100027

Aditi Gupta (Contact Author)

King's Business School ( email )

30 Aldwych
London, WC2B 4BG
United Kingdom

Steven Young

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+441 5245-94242 (Phone)
+441 5248-47321 (Fax)

David T. Otley

Lancaster University ( email )

The Management School
Lancaster LA1 4YF
United Kingdom
+441 524 593 632 (Phone)
+441 524 652 01 (Fax)

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