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

57 Pages Posted: 25 Aug 2010 Last revised: 26 Oct 2015

See all articles by Omesh Kini

Omesh Kini

Georgia State University

Nishant Dass

Georgia Institute of Technology - Scheller College of Business

Bunyamin Onal

Aalto University

Jun Wang

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

Vikram K. Nanda

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

Date Written: August 22, 2011

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 Directors, Firm Innovativeness, Industry Structure and Information Gap

JEL Classification: G34, G39

Suggested Citation

Kini, Omesh and Dass, Nishant and Onal, Bunyamin and Wang, Jun and Nanda, Vikram K., Board Expertise: Do Directors from Related Industries Help Bridge the Information Gap? (August 22, 2011). 23rd Australasian Finance and Banking Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1663584 or http://dx.doi.org/10.2139/ssrn.1663584

Omesh Kini

Georgia State University ( email )

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

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

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

Vikram K. Nanda (Contact Author)

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

Register to save articles to
your library

Register

Paper statistics

Downloads
346
rank
84,625
Abstract Views
2,177
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information