41 Pages Posted: 14 Mar 2012 Last revised: 22 Apr 2014
Date Written: February 9, 2012
While the fraction of independent directors has been widely used as a proxy for monitoring effectiveness of the board, there are no clear-cut measures that capture the advising effectiveness of the board. We develop and validate two new measures of board advising: (i) per-outside-director advising quality; and (ii) aggregate board advising capability. These measures, which are based on connections of outside directors to directors on other boards, offer the advantage of being easy to compute from readily available data. We find that as firm demand for advising, as measured by firm complexity, increases: (i) both advising quality and total advising increase; and (ii) the sensitivity of firm value to both advising quality and total advising increase.
Keywords: board advising, advising quality, directors, board characteristics, Corporate Governance, firm complexity
JEL Classification: G32, G34, K22
Suggested Citation: Suggested Citation