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Journal cover: Accounting, Auditing & Accountability Journal

Accounting, Auditing & Accountability Journal

ISSN: 0951-3574

Online from: 1988

Subject Area: Accounting and Finance

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Does superior firm performance lead to higher quality outside directorships?


Document Information:
Title:Does superior firm performance lead to higher quality outside directorships?
Author(s):Aditi Gupta, (Department of Management, King's College London, London, UK), David Otley, (Department of Accounting and Finance, Lancaster University Management School, Lancaster, UK), Steven Young, (Department of Accounting and Finance, Lancaster University Management School, Lancaster, UK)
Citation:Aditi Gupta, David Otley, Steven Young, (2008) "Does superior firm performance lead to higher quality outside directorships?", Accounting, Auditing & Accountability Journal, Vol. 21 Iss: 7, pp.907 - 932
Keywords:Chief executives, Labour market, Non-executive directors, Organizational performance
Article type:Research paper
DOI:10.1108/09513570810907410 (Permanent URL)
Publisher:Emerald Group Publishing Limited
Acknowledgements:The authors are grateful to two anonymous referees, Richard Laughlin, Chris Mallin, Ken Peasnell, seminar participants at the EIASM 3rd Workshop on Corporate Governance (Brussels, 2006) and the British Accounting Association Annual Conference (London, 2007) for helpful comments.
Abstract:

Purpose – Holding the number of outside directorships constant, this paper aims to test 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. The 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. The paper is the first to measure and model directorship quality.



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