Industry Expertise of Independent Directors and Board Monitoring
74 Pages Posted: 11 Mar 2013 Last revised: 19 Jan 2017
Date Written: October 2015
Abstract
Does industry experience affect the monitoring effectiveness of independent directors? On the one hand, prior industry experience provides independent directors industry-specific knowledge and expertise critical for understanding and evaluating managerial decision making, thereby enhancing their monitoring capability. On the other hand, independent directors with prior experience in the firm’s industry may be socially connected with or sympathetic to the firm’s management, thus impairing their monitoring incentives. We test these competing hypotheses in a variety of firm polices and decision making. Specifically, we find that the presence of independent directors with industry experience on a firm’s audit committee significantly curtails firms’ earnings management via abnormal accruals and reduces both ex ante and ex post probabilities of firms committing financial fraud. In addition, a greater representation of independent directors with industry expertise on a firm’s compensation committee reduces CEO excess compensation and a greater presence of such directors on the full board increases the CEO turnover-performance sensitivity and improves acquirer returns from diversifying acquisitions. Overall, the evidence is the consistent with the hypothesis that having relevant industry expertise enhances independent directors’ ability to perform their monitoring function. As such, our study sheds new light on the determinants of board effectiveness and provides important policy implications for the design of corporate boards.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems
-
Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature
-
Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature
-
Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature
-
CEO Involvement in the Selection of New Board Members: An Empirical Analysis
By David Yermack and Anil Shivdasani
-
The Uncertain Relationship between Board Composition and Firm Performance
By Sanjai Bhagat and Bernard S. Black
-
The Non-Correlation between Board Independence and Long-Term Firm Performance
By Sanjai Bhagat and Bernard S. Black
-
The Non-Correlation between Board Independence And Long-Term Firm Performance
By Sanjai Bhagat and Bernard S. Black