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UBC Theses and Dissertations

Outside directors signaling, monitoring and compensation Deutsch, Yuval

Abstract

This thesis is comprised of three essays dealing with outside directors. The first essay addresses the signaling role that outside directors play. This is a role that is especially important for entrepreneurial firms, and has been relatively neglected in corporate governance research. The primary contribution of this chapter is in developing an analytical model and predictive framework on which future empirical and analytical research on directors' signaling role can be based. This chapter also contributes to the signaling theory literature by deriving a new type of equilibrium — the "stochastic separating equilibrium" — which may well be applicable in a broader set of models that incorporate signaling through middlemen. This equilibrium has an important realistic feature in that it permits the coexistence of both high and low quality firms in equilibrium. In the second study, I address directors' monitoring role. This essay examines whether a systematic relationship exists between a board's composition and discrete strategic decisions of a firm, which have been addressed in the literature as involving potential conflicting interests between managers and shareholders. To explore this question, I conducted seven meta-analyses of relevant strategic decisions, on which I could obtain data. The results provide evidence for the presence of systematic relationships between a board's composition and five out of the seven strategies examined. Interestingly, these systematic relationships provide only limited support to the predictions of agency theory, which is the predominant rational behind this line of research. In the third essay, I examine the effects of outside directors' stock-based compensation on one indicator of board monitoring effectiveness: firms' research and development (R&D) intensity. The results suggest that both the percentage of stock-based compensation and the proportion of stock options within it are positively related to firms' R & D expenditures. Moreover, stock-based compensation moderates the relationship between board composition and R & D intensity. These results highlight the need to reevaluate previous findings that addressed the effects of board composition on both firm performance and firm strategic decisions.

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