The Influence of Directors from Related Industries in Shaping Firm Policies

48 Pages Posted: 19 Aug 2012

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

Date Written: November 1, 2011

Abstract

Does the specific background and expertise of outside directors influence corporate policies? While the literature recognizes that directors contribute to firm value through their monitoring and advisory functions, the precise manner and extent to which directors’ expertise affects the firm’s operational and financial decisions is not well understood. We analyze this issue by identifying a group of directors that are likely to have considerable knowledge about the firm’s industry: directors from related upstream (supplier) or downstream (customer) industries (DRIs). We then investigate the impact of DRIs on specific corporate policies. We find that firms with DRIs benefit from: (1) shorter cash-conversion cycles, (2) lower inventory, (3) lower accounts receivable and, (4) higher accounts payable. We also find that firms with DRIs are less financially constrained as indicated by their lower cash-to-cash flow sensitivities. In addition, the investment to cash flow sensitivity is also lower with DRIs, thereby suggesting that they reduce investment distortions within firms. Further, investment responds less to stock prices (measured by Tobin’s Q) in firms with DRIs when the stock prices are not very informative – suggesting that DRIs act as alternative conduits of information. In a similar vein, we find that firms with DRIs utilize their production factors more efficiently (as measured by labor and total factor productivity), thus signifying that the industry expertise of DRIs helps the firm better anticipate industry conditions and trends.

Keywords: Directors from Related Industries, Boards of Directors, Firm Policies, Supplier and Customer Industries

JEL Classification: G30, G34, G39

Suggested Citation

Dass, Nishant and Kini, Omesh and Nanda, Vikram K. and Onal, Bunyamin, The Influence of Directors from Related Industries in Shaping Firm Policies (November 1, 2011). Available at SSRN: https://ssrn.com/abstract=2131994 or http://dx.doi.org/10.2139/ssrn.2131994

Nishant Dass (Contact Author)

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

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

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