Using industry-specific exogenous changes in product market competition, I test whether firms optimally respond to changes in the demand for board independence. I find that firms decrease their level of board independence by 5.52 percentage points in response to an increase in product market competition. Moreover, by exploiting the 2003 NYSE and NASDAQ rulings that limit firms' ability to reduce board independence, I show that firms' reductions in board independence as a response to stronger competition increase shareholder value. Firms constrained by the regulation experience 6.98 percentage points lower return on assets (ROA) compared to unconstrained firms. By showing that regulation may actually harm some firms, the analysis sheds light on the costs of ``one size fits all" governance regulations.
There is recent evidence of the associations between CEO ideology and certain firm level outcomes, however, the effect of CEO ideology on overall firm performance is not well documented. I measure the political ideology of U.S. CEOs using individual campaign contribution data and analyze the relation between CEO ideology and firm performance over the period 1994 to 2014. I show that Republican CEOs are associated with 3.6 percentage points higher return on assets compared to Democrat CEOs. In order to show that this effect is causal, I construct novel instruments for CEO ideology. I document consistent and robust results which highlight that Republican CEOs outperform Democrat CEOs. Several alternate explanations such as time varying differences at state-industry level, political connections, firm fixed effects and mechanisms identified in the literature do not explain away the results. Analysis on total factor productivity suggests that Republican CEOs are not more productive compared to Democrat CEOs, but rather distribute a greater portion of wealth to their shareholders.
We test whether focal firms whose CEOs sit on multiple boards can suffer decreases in performance due to transient attention-grabbing events in firms where CEOs sit as independent directors. We exploit extreme returns (positive and negative), extreme earnings and extreme volatility in firms where CEOs sit as independent directors and find that such distraction leads to an average decrease of approximately 1% of focal firms’ ROA, Q, market returns and ROE. This effect is stronger for focal firms that are geographically more distant to firms where CEOs sit as independent directors, which suggests that distraction is costlier in such situations. Additionally, we show that distraction is greater for CEOs that sit on the audit committee or chair a major sub-committee. Finally, we show that these distraction events also lead to lower CEO compensation and higher probability of forced turnover.