Human capital and monitoring efficacy of interlocked directors

While the existing research considers centrality measures to capture the extent of director interlocking, the novelty of the first empirical study in this thesis lies in its consideration of the human capital of connected directors as a measure of interlocking quality. Using US data from 2000 to 2016, I find that both the extent and quality of director interlocking exert a significant positive impact on firm performance. I demonstrate that directors’ monitoring function represents an important channel through which director interlocking influences firm performance. The findings are robust to alternative centrality measures of director interlocking. In addition, I use the death of interlocked directors as natural exogenous shock in a quasi-natural experiment to address endogeneity concerns. This study provides important insights for shareholders and nomination committee members in making decisions about appointing interlocked directors to the board. The second empirical study of this thesis investigates whether interlocked directors are effective monitors with regard to stock price crash risk. I find that director interlocking decreases stock price crash risk. Firms with higher director interlocking have a lower likelihood of hoarding bad news. This is because the information advantage of interlocked directors gained through formal board ties may motivate them to monitor management more stringently. I show that the monitoring role represents an important channel through which director interlocking influences stock price crash risk. These findings are robust to alternative centrality measures of director interlocking and measures of crash risk. In addition, I use the death of interlocked directors as a natural exogenous shock in a quasi-natural experiment as well as an instrumental variable regression approach to address endogeneity concerns. This study provides important insights for shareholders and nomination committee members in making decisions about appointing directors to the board by demonstrating that interlocked directors can work as a control mechanism to restrain managerial bad news hoarding.