Industry Expertise on Corporate Boards

47 Pages Posted: 25 Jul 2012 Last revised: 26 Apr 2017

See all articles by Olubunmi Faleye

Olubunmi Faleye

Northeastern University - Finance Group

Rani Hoitash

Bentley University - Department of Accountancy

Udi Hoitash

Northeastern University - Accounting Group

Date Written: January 30, 2017

Abstract

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

Faleye, Olubunmi and Hoitash, Rani and Hoitash, Udi, Industry Expertise on Corporate Boards (January 30, 2017). Review of Quantitative Finance and Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2117104 or http://dx.doi.org/10.2139/ssrn.2117104

Olubunmi Faleye

Northeastern University - Finance Group ( email )

Boston, MA 02115
United States

Rani Hoitash (Contact Author)

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452-4705
United States

Udi Hoitash

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States
671-373-5839 (Phone)

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