Playing Favorites? Industry Expert Directors in Diversified Firms

59 Pages Posted: 29 Jan 2015 Last revised: 3 Feb 2017

See all articles by Jesse A. Ellis

Jesse A. Ellis

North Carolina State University

C. Edward Fee

Tulane University - A.B. Freeman School of Business

Shawn Thomas

University of Pittsburgh - Katz Graduate School of Business

Date Written: January 25, 2017

Abstract

We examine the influence of outside directors’ industry experience on segment investment, segment operating performance, and firm valuation for conglomerates. Given board composition is endogenous, we instrument for the presence of industry expert directors using the supply of experienced executives near conglomerate firms’ headquarters. We find that industry expert representation on the board causes increased segment investment. Consistent with experienced directors playing favorites rather than acting as dispassionate advisors, segment profitability (firm value) is lower for segments (firms) with industry expert outside directors. We do not find analogous negative profitability or valuation effects of director experience for single-segment firms.

Keywords: Director experience, corporate diversification, investment

JEL Classification: G34, G31

Suggested Citation

Ellis, Jesse A. and Fee, C. Edward and Thomas, Shawn, Playing Favorites? Industry Expert Directors in Diversified Firms (January 25, 2017). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2556407 or http://dx.doi.org/10.2139/ssrn.2556407

Jesse A. Ellis (Contact Author)

North Carolina State University ( email )

Poole College of Management
Campus Box 7229
Raleigh, NC 27695
United States
919-515-9670 (Phone)

C. Edward Fee

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Shawn Thomas

University of Pittsburgh - Katz Graduate School of Business ( email )

246 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-1648 (Phone)
412-648-1693 (Fax)

HOME PAGE: http://www.pitt.edu/~shthomas/index.htm

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
192
Abstract Views
1,363
rank
172,283
PlumX Metrics