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

57 Pages Posted: 14 Jun 2010 Last revised: 26 Oct 2015

See all articles by Nishant Dass

Nishant Dass

Georgia Institute of Technology - Scheller College of Business

Omesh Kini

Georgia State University

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Bunyamin Onal

Aalto University

Jun Wang

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: August 20, 2010

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.

Keywords: Supply-chain, Boards of Directors, Board Monitoring, Board Advice, Firm Innovativeness, Industry Structure, and Information Gap

JEL Classification: G34, G39

Suggested Citation

Dass, Nishant and Kini, Omesh and Nanda, Vikram K. and Onal, Bunyamin and Wang, Jun, Board Expertise: Do Directors from Related Industries Help Bridge the Information Gap? (August 20, 2010). Available at SSRN: https://ssrn.com/abstract=1572668 or http://dx.doi.org/10.2139/ssrn.1572668

Nishant Dass

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-5109 (Phone)

HOME PAGE: http://scheller.gatech.edu/dass

Omesh Kini (Contact Author)

Georgia State University ( email )

University Plaza
Atlanta, GA 30303-3083
United States
404-651-2656 (Phone)

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Bunyamin Onal

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

Jun Wang

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

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