Industry Expertise on Corporate Boards
47 Pages Posted: 25 Jul 2012 Last revised: 26 Apr 2017
Date Written: January 30, 2017
Recent surveys indicate that industry expertise is the most sought-after director qualification. Yet evidence on the value of such expertise is limited. This paper shows that firms that are difficult for non-experts to monitor and advise are more likely to appoint industry expert directors. Such appointments also depend on the supply of industry-experienced candidates in the local director labor market. Board industry expertise reduces R&D-based real earnings management and increases R&D investments. The increase in R&D spending is value-enhancing: firms with industry expert directors receive more patents for the same level of R&D, their R&D spending is associated with lower volatility of future earnings, and their value is higher. Finally, industry expertise is associated with CEO termination and pay incentives that encourage R&D investments.
Keywords: Director qualifications, Industry expertise, Firm value, Corporate innovation,Real earnings management, R&D.
JEL Classification: G34, M40
Suggested Citation: Suggested Citation