The impact of board of directors on stock comovement, stock return performance and cybersecurity risk of US firms

Abstract

The doctoral thesis consists of three empirical chapters that aim to validate key questions about the board structure in the S&P 500 and its consequences. This research provides novel empirical evidence on this topic. The literature review is drawn from multiple corporate governance and social psychology theories, including Agency, Stewardship and Resource dependency theories which enable a deeper understanding of board effectiveness. According to agency theory, the agency problem between principals and agents (i.e. shareholders and managers, respectively) undermines value maximisation. The board of directors, it has been argued, is an efficient corporate governance mechanism for resolving the agency problem between shareholders and management. Several factors make the study of the board of directors and its consequences important and empirically worthwhile: (i) limited body of literature investigating board of directors' structures as a collection of practices, (ii) regulators across the globe are showing greater interest in advocating for increased diversity in boardrooms; and (iii) increased attention from regulators on the incorporation of information security strategy into strategic discussions at the board-level. The first empirical chapter (Essay 1) investigates the influence of corporate governance monitoring and incentive alignment provisions as a bundle on stock price comovement. Additionally, it seeks to determine whether this relationship is moderated by the US national governance quality (NGQ). Using a dataset of 329 S&P 500 companies from 2009 to 2017, the study finds statistically significant evidence of the quid pro quo hypothesis, in that monitoring mechanisms and incentive alignment provisions as a bundle of corporate governance mechanisms weaken comovement of stock prices. Also, the study evidences a complementary relationship between NGQ and firm board monitoring. Instrumental variable tests that exploit exogenous variations in board-level monitoring strength and levels of incentive alignment amongst directors indicate that these relations are causal. In summary, the results suggest that a combination of governance mechanisms in boardrooms is required for board effectiveness. The second empirical chapter (Essay 2) investigates whether differences in diversity reflected by the heterogeneity of board members' political ideologies predict a firm’s resilience. Data on individual political donations were utilised to assess the political ideology of 11,741 directors from 328 S&P 500 firms. The empirical study results suggest that the SARS-CoV-2-induced plunge in equity returns was milder among firms with more heterogeneous boards, reinforcing the notion that ideologically diverse boards are related to better firm performance. In our study, we present initial evidence demonstrating the wide-ranging effects of ideological diversity in corporate boardrooms. Specifically, we explore how such diversity (ideological board diversity) materialises in the equity price performance of firms’ during times of uncertainty. In the last empirical chapter (Essay 3), the study focuses on the influence of board leadership structure (CEO duality) and the moderating role of female directors, IT expertise and market competition on firms' effectiveness in information security management. This research draws on corporate governance (agency, stewardship and resource dependency) theories to conduct an exploratory empirical study on the association between the board structure and the possibility of information security breaches. Using a sample of 3,779 firm-year observations from the S&P500 from 2009 to 2018, the results show that CEO duality could reduce the possibility of security breaches, while the proportion of women on board could exacerbate the risk of security breaches. Furthermore, the study finds that product market competition, female representation in the boardrooms and the presence of IT expertise moderates the relationship between CEO duality and the risk of cybersecurity breaches. Also, as corporate governance practitioners continue to advocate for more IT expertise on the board, the findings of this study suggest that duality can mitigate the need for IT expertise at the board level. The study provides valuable insight into how external corporate governance influence from the product market operates as an alternate governance mechanism for cyber security monitoring.