Industry Expert Directors

67 Pages Posted: 27 Apr 2013 Last revised: 11 May 2017

Wolfgang Drobetz

Hamburg University

Felix von Meyerinck

University of St. Gallen - School of Finance

David Oesch

University of Zurich

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance

Date Written: May 10, 2017

Abstract

We analyze the valuation effect of board industry experience and channels through which industry experience of outside directors affects firm value. Our analysis shows that firms with more experienced outside directors are valued at a premium compared to firms with less experienced outside directors. Additional analyses, including a quasi-experimental setting based on director deaths, mitigate endogeneity concerns. Further tests show that the board industry experience-firm value relation is more pronounced for firms with larger investment programs, larger cash reserves, and during crises. In contrast, it is weaker in more dynamic industries where the value of previously acquired experience is likely to be diminished. We also provide some evidence that corporate governance problems in firms, in particular entrenched CEOs, and a limited supply of industry experts prevent firms from appointing more industry experts to their boards, even though this would be value-increasing. Overall, our findings are consistent with board industry experience being a valuable corporate governance mechanism.

Keywords: Board of directors, Director skills and experience, Corporate governance, Corporate Investments

JEL Classification: G32, G34

Suggested Citation

Drobetz, Wolfgang and von Meyerinck, Felix and Oesch, David and Schmid, Markus, Industry Expert Directors (May 10, 2017). University of St.Gallen, School of Finance Research Paper No. 2014/01; 28th Australasian Finance and Banking Conference. Available at SSRN: https://ssrn.com/abstract=2256477 or http://dx.doi.org/10.2139/ssrn.2256477

Wolfgang Drobetz

Hamburg University ( email )

Moorweidenstrasse 18
Hamburg, 20148
Germany

Felix Von Meyerinck

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

David Oesch

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Markus Schmid (Contact Author)

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, 9000
Switzerland

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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