To Delegate or Not to Delegate to Stock Markets? The Case of Boards with Related Industry Expertise

Abstract:     
I examine the extent to which boards with expertise in the firm’s related industries, i.e., downstream (customer) or upstream (supplier) industries, delegate their monitoring and advisory functions to stock markets. Directors from related industries (DRIs) are argued to acquire information about product markets more readily. This, in turn, is predicted to alleviate the need for stock-based incentives particularly for firms with greater dependence on product markets and those with less informative stock prices. The evidence documented in this paper is largely consistent with these predictions. A number of additional tests suggest that this evidence is not likely to be explained by the potential conflict of interests between the firm’s stockholders and DRIs. Hence, I conclude that boards with related industry expertise delegate to stock markets to an optimally lesser extent due to their informational advantages.

Number of Pages in PDF File: 59

Keywords: Board of Directors, Pay-for-Performance Sensitivity, CEO Incentives, Related Industries, Customer, Supplier, Forced Turnovers, Sector Performance

JEL Classification: D8, J3, G3

working papers series