Board Expertise: Do Directors from Related Industries Help Bridge the Information Gap?

Abstract:     
We investigate the importance of board expertise by analyzing the role of “directors from related industries” (DRIs) on a firm’s board. DRIs are officers and/or directors of companies in the upstream (supplier) or downstream (customer) industries of the firm. About 40% of firm-years in our sample have at least one DRI. We propose and test information, market structure, and agency hypotheses about when DRIs are likely to add value. Consistent with the information hypothesis, DRIs are present when the information gap is more severe, such as in innovative firms/industries and in firms with less informative stock prices. Consistent with the market structure hypothesis, DRIs are also more likely in firms with larger market share and in more concentrated or vertically integrated industries. After correcting for endogeneity, DRIs have an economically significant impact on firm value and performance – especially when information problems are worse and boards have relatively greater power to monitor managers. Hence, a possible explanation for DRIs not being sought more widely is managerial resistance to monitoring by a better informed board. Finally, DRIs appear to enhance the ability of firms to handle negative industry shocks, suggesting that they narrow the information gap.

Number of Pages in PDF File: 57

Keywords: Supply-Chain Directors, Firm Innovativeness, Industry Structure and Information Gap

JEL Classification: G34, G39

working papers series