Intertemporal endogeneity in board composition and financial performance

Abstract

The impact of board composition on overall financial performance is not at all clear. One problem with measuring their relation may be that board of director composition and financial performance are endogenously determined. A second problem may be that due to fixed board terms and periodic financial reporting, the relation may be intertemporal. We develop a theory of intertemporal endogeneity of board composition and financial performance. Using causality tests in panel regressions with three years of data for 130 closed-end mutual funds, we find only minimal evidence of intertemporal endogeneity. The evidence that board composition influences financial performance is not very strong and depends on the definitions of financial performance and board composition as well as the type of statistical model employed. We do find somewhat stronger evidence that prior financial performance impacts board composition, but the relation depends on how we define board composition