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Individual Directors and Firm Performance: Evidence from the Two-Tiered Board System

I examine the role of unobserved heterogeneities of directors as a determinant of firm performance. Based on a panel data set of 898 German firms covering the period 1992-2011, I find director fixed effects are almost as important in explaining firm performance as executive fixed effects and a large set of observable board, firm, and executive/director characteristics. Models without directors’ fixed effects may suffer from an omitted variable bias and may lead to misleading interpretations regarding board structure characteristics. My evidence suggests that the selection of directors is an important policy choice and affects firm performance.