Essays in Corporate Finances and Firm Dynamics

Abstract

This dissertation examines how the changes in the structure of corporate boards of publicly traded firms can have an impact on both the corporate finance decisions of the firm as well as have broader market-wide implications due to the subsequent changes in relative firm dynamics that may result from the changes at the board level. Central to this study is the role of the outside board of director. This outside director has at least two channels of effect on the firm. Each of the chapters closely examines one of these effects. The first chapter explores how outside directors can aid firms in "competitively positioning" the firm in both a product-market and technological-market space. The increasing prevalence of shared directors among firms has led to more boards being connected through a board network. Contrary to the long standing belief that closeness on a board network aids in imitation across firms, I document the presence of "strategic differentiation" between the firms. I provide causal evidence that changes in the distance between two boards, or changes in the board network distance, is inversely related to the similarities in revenue distribution from industries. Moreover, this board network distance also has explanatory power over how firm decide their long-term technological direction(measured by the distribution of technology classes of the patents granted and also by the change in the number of relative patent-citations between the two firms). In other words, closeness between firms on a board network leads to "strategic differentiation" in both the product-market and technological-market space. However, contrary to classical explanations of collusion between firms, I find that there is no evidence that the prevalence of industry connections between boards, has led to changes in average industry prices. I attribute this to the possibility that board networks aid firms in avoiding wasteful duplication of products and technologies. The second chapter take a more micro view of the heterogenous nature of the outside director. Media press releases of firms often extol the unique qualifications and experiences of the outside directors that they hire, yet their contributions to the firm are often difficult to measure. This chapter argues that "industry expertise" is a highly sought after and measurable quality of the outside director. To quantify the effects of the outside director's industry expertise on the firm, I introduce a novel new methodology for constructing this industry expertise measure from the director's resume. The simplicity of the measure also allows it to incorporate the entirety of the director's historical resume, including employment at private firms. With this measure, I find that boards actively seek out outside directors that contribute unique industry expertise thereby expanding the firm's expertise areas. This has a profound effect as I show that firms that hire directors that are more different than their expertise areas are then more likely to invest and R\&D. This acceleration of spending also results in more product differentiation from the firm's primary competitors.