Board Heterogeneity of Expertise and Firm Performance

Abstract

This study examines the relation between measures of boards’ advisory effectiveness and firm value, assuming that greater heterogeneity in the board’s functional expertise leads to better strategic decisions, thereby increasing firm value in expectation, ceteris paribus. We find preliminary support for this hypothesis in that functional expertise heterogeneity of the board is positively associated with firm value. Given the endogeneity inherent in such an analysis, in two additional identification strategies, we find that investors react positively when a new director appointment increases the board’s expertise heterogeneity, and that investors react positively to announcements of central firm strategic decisions, mergers and acquisition decisions, only for firms with greater heterogeneity in board skills.

JEL Classification: G32, G34, G14