Director Characteristics and the Advisory Role of Boards’ Effect on Performance: Evidence from Real Estate Investment Trusts

Using REITs as a laboratory to isolate the advisory role of the board of directors, we determine that directors with executive or governance experience in finance and accounting create significant value. Adding “high-value” directors is associated with an increase in monthly returns of between 1.1% and 2%, along with a 50-basis point increase in risk-adjusted return. Cumulative abnormal returns indicate that high-value directors are added to underperforming REITs, and results hold when controlling for endogeneity. High-value board members increase capital use efficiency, sell underperforming properties, and focus future investments on outperforming submarkets, while having higher pay-to-performance sensitivity and shorter tenure than average directors.