The Right Director in the Right Firm: Director Heterogeneity, Sorting and Firm Performance

This paper studies the role of the matching between firms and directors appointed to their boards in determining firm outcomes. I apply a finite-mixture random-effects model to estimate the contribution of unobserved firm and director heterogeneity while explicitly allowing for an interaction between the two to estimate the quality of the match between board members and firms. Results reveal that positive complementarities drive positive sorting between firms and their directors. Using hand-collected data and textual analysis to build a large dataset on directors' skills and qualifications, I find in particular directors with specialized skill sets to be associated with higher complementarities. In contrast, consistent with the idea of knowledge hierarchies in the firm, CEOs and CFOs tend to be generalists relying on directors' advice. Finally, I exploit unexpected deaths of directors to establish that boards, where productivity is concentrated to a few highly complementary directors, have a positive causal effect on firm value and firm performance. The paper thereby offers new evidence on the organizational structure within the firm and its impact on firm performance.