Essays in corporate governance

This dissertation examines the role of non-CEO executives serving on their firm's corporate board of directors. I use the external labor market for directorships to distinguish among inside directors those who are more valuable to shareholders. I find that inside directors who hold an outside directorship are associated with significantly better firm performance and higher market-to-book ratios. I also find that they are more likely to become a CEO than are other non-CEO inside directors. Correspondingly, I find inside operating officers (chairpersons) holding an outside board seat are associated with increases in forced CEO turnover sensitivity to firm accounting (market) performance and greater sensitivity of CEO compensation to stock performance (lower CEO compensation). These findings support the importance of the external labor market for directorships in identifying and rewarding valuable inside directors. I also examine the value of granting an inside executive with financial expertise, the Chief Financial Officer (CFO), a board seat and a vote on key board decisions. I find the appointment of the CFO to the board is associated with an increased likelihood of security issuance, greater changes in leverage, better operating performance and increases in the number of business segments. This evidence supports the hypothesis that granting the financial expert a board seat and a vote leads to differences in board decision making and creates greater financial flexibility. Together these findings illustrate the important role of inside directors on corporate boards.