Director Alpha: An Objective Measure of Director Contribution

Abstract

The appointment of contributing directors is associated with immediate positive market reaction, and the presence of contributing directors in the board enhances long-run firm value. We identify the contribution of directors by alpha, or the abnormal risk-adjusted stock returns that are generated in other firms on whose boards they sit. We find that investors react positively when high alpha directors are appointed to high alpha boards. CEOs and individuals with MBA or CPA designations are more likely to be contributing directors. We find that high alpha directors contribute significantly to firm value. For the typical firm, our parameter estimates imply that replacing a negative alpha director with a positive one is associated with a 1.8% improvement in firm value.

Keywords: Director Alpha, Board Alpha, Director Quality, Director Appointments

JEL Classification: G14, G34