Hostname: page-component-6bf8c574d5-pdxrj Total loading time: 0 Render date: 2025-03-04T04:23:49.217Z Has data issue: false hasContentIssue false
  • English
  • Français

Industry Expertise of Independent Directors and Board Monitoring

Published online by Cambridge University Press:  23 December 2015

Cong Wang ,
Fei Xie  and
Min Zhu
Cong Wang*
Affiliation:
congwang@baf.cuhk.edu.hk, Chinese University of Hong Kong, CUHK Business School, Shatin, Hong Kong
Fei Xie
Affiliation:
xief@udel.edu, University of Delaware, Lerner College of Business and Economics, Newark, DE 19716
Min Zhu
Affiliation:
minzhu@cityu.edu.hk, City University of Hong Kong, College of Business, Kowloon Tong, Hong Kong.
*
*Corresponding author: congwang@baf.cuhk.edu.hk
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We examine whether the industry expertise of independent directors affects board monitoring effectiveness. We find that the presence of independent directors with industry experience on a firm’s audit committee significantly curtails firms’ earnings management. In addition, a greater representation of independent directors with industry expertise on a firm’s compensation committee reduces chief executive officer (CEO) excess compensation, and a greater presence of such directors on the full board increases the CEO turnover-performance sensitivity and improves acquirer returns from diversifying acquisitions. Overall, the evidence is consistent with the hypothesis that having relevant industry expertise enhances independent directors’ ability to perform their monitoring function.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 5 , October 2015 , pp. 929 - 962
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

References

Adams, R., and Ferreira, D.. “A Theory of Friendly Boards.” Journal of Finance, 62 (2007), 217–250.Google Scholar
Adams, R.; Hermalin, B.; and Weisbach, M.. “The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey.” Journal of Economic Literature, 48 (2010), 58–107.Google Scholar
Agrawal, A., and Chadha, S.. “Corporate Governance and Accounting Scandals.” Journal of Law and Economics, 48 (2005), 371–406.CrossRefGoogle Scholar
Andrade, G.; Mitchell, M.; and Stafford, E.. “New Evidence and Perspectives on Mergers.” Journal of Economic Perspectives, 15 (2001), 103–120.CrossRefGoogle Scholar
Bergstresser, D., and Philippon, T.. “CEO Incentives and Earnings Management.” Journal of Financial Economics, 80 (2006), 511–529.Google Scholar
Burgstahler, D.; Hail, L.; and Leuz, C.. “The Importance of Reporting Incentives: Earnings Management in European Private and Public Firms.” Accounting Review, 81 (2006), 983–1016.Google Scholar
Cai, J.; Garner, J.; and Walkling, R.. “Electing Directors.” Journal of Finance, 64 (2009), 2389–2421.CrossRefGoogle Scholar
Cheng, Q., and Warfield, T.. “Equity Incentives and Earnings Management.” Accounting Review, 80 (2005), 441–476.Google Scholar
Cohen, D.; Dey, A.; and Lys, T.. “Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes-Oxley Periods.” Accounting Review, 83 (2008), 757–787.CrossRefGoogle Scholar
Core, J., and Guay, W.. “Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility.” Journal of Accounting Research, 40 (2002), 613–630.CrossRefGoogle Scholar
Coughlan, A., and Schmidt, R.. “Executive Compensation, Management Turnover, and Firm Performance: An Empirical Investigation.” Journal of Accounting and Economics, 7 (1985), 43–66.Google Scholar
Dass, N.; Kini, O.; Nanda, V.; Onal, B.; and Wang, J.. “Board Expertise: Do Directors from Related Industries Help Bridge the Information Gap?” Review of Financial Studies, 27 (2014), 1533–1592.CrossRefGoogle Scholar
Dechow, P.; Ge, W.; Larson, C.; and Sloan, R.. “Predicting Material Accounting Misstatements.” Contemporary Accounting Research, 28 (2011), 17–82.Google Scholar
Dechow, P.; Ge, W.; and Schrand, C.. “Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences.” Journal of Accounting and Economics, 50 (2010), 344–401.Google Scholar
Dechow, P.; Sloan, R.; and Sweeney, A.. “Detecting Earnings Management.” Accounting Review, 70 (1995), 193–225.Google Scholar
Dechow, P.; Sloan, R.; and Sweeney, A.. “Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC.” Contemporary Accounting Research, 12 (1996), 1–36.Google Scholar
DeFond, M.; Hann, R.; and Hu, X.. “Does the Market Value Financial Expertise on Audit Committees of Boards of Directors?” Journal of Accounting Research, 43 (2005), 153–193.CrossRefGoogle Scholar
Dhaliwal, D.; Naiker, V.; and Navissi, F.. “The Association between Accruals Quality and the Characteristics of Accounting Experts and Mix of Expertise on Audit Committees.” Contemporary Accounting Research, 27 (2010), 787–827.Google Scholar
Dichev, I.; Graham, J.; Harvey, C.; and Rajgopal, S.. “Earnings Quality: Evidence from the Field.” Journal of Accounting and Economics, 56 (2013), 1–33.Google Scholar
Duchin, R.; Matsusaka, J.; and Ozbas, O.. “When Are Outside Directors Effective?” Journal of Financial Economics, 96 (2010), 195–214.CrossRefGoogle Scholar
Fama, E., and French, K.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427–465.Google Scholar
Fernandes, N., and Fich, E.. “ Does Financial Experience Help Banks during Credit Crises?” Working Paper, Drexel University (2012).Google Scholar
Fich, E., and Shivdasani, A.. “Are Busy Boards Effective Monitors?” Journal of Finance, 61 (2006), 689–724.CrossRefGoogle Scholar
Fich, E., and Shivdasani, A.. “Financial Fraud, Director Reputation, and Shareholder Wealth.” Journal of Financial Economics, 86 (2007), 306–336.Google Scholar
Gong, G.; Louis, H.; and Sun, A.. “Earnings Management and Firm Performance Following Open-Market Repurchases.” Journal of Finance, 63 (2008), 947–986.Google Scholar
Guner, A.; Malmendier, U.; and Tate, G.. “Financial Expertise of Directors.” Journal of Financial Economics, 88 (2008), 323–354.Google Scholar
Harris, M., and Raviv, A.. “A Theory of Board Control and Size.” Review of Financial Studies, 21 (2008), 1797–1832.Google Scholar
Hazarika, S.; Karpoff, J.; and Nahata, R.. “Internal Corporate Governance, CEO Turnover, and Earnings Management.” Journal of Financial Economics, 104 (2012), 44–69.Google Scholar
Hennes, K.; Leone, A.; and Miller, B.. “The Importance of Distinguishing Errors from Irregularities in Restatement Research: The Case of Restatements and CEO/CFO Turnover.” Accounting Review, 83 (2008), 1487–1519.Google Scholar
Hermalin, B., and Weisbach, M.. “Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature.” Economic Policy Review, 9 (2003), 7–26.Google Scholar
Huson, M.; Malatesta, P.; and Parrino, R.. “Managerial Succession and Firm Performance.” Journal of Financial Economics, 74 (2004), 237–275.CrossRefGoogle Scholar
Huson, M.; Parrino, R.; and Starks, L.. “Internal Monitoring Mechanisms and CEO Turnover: A Long-Term Perspective.” Journal of Finance, 56 (2001), 2265–2297.Google Scholar
Jones, J. “Earnings Management during Import Relief Investigations.” Journal of Accounting Research, 29 (1991), 193–228.Google Scholar
Karpoff, J.; Lee, D.; and Martin, G.. “The Cost to Firms of Cooking the Books.” Journal of Financial and Quantitative Analysis, 43 (2008), 581–611.CrossRefGoogle Scholar
Klein, A. “Audit Committee, Board of Director Characteristics, and Earnings Management.” Journal of Accounting and Economics, 33 (2002), 375–400.Google Scholar
Knyazeva, A.; Knyazeva, D.; and Masulis, R.. “The Supply of Corporate Directors and Board Independence.” Review of Financial Studies, 26 (2013), 1561–1605.CrossRefGoogle Scholar
Kothari, S. P.; Leone, A.; and Wasley, C.. “Performance Matched Discretionary Accrual Measures.” Journal of Accounting and Economics, 39 (2005), 163–197.Google Scholar
Krishnan, G., and Visvanathan, G.. “Does the SOX Definition of an Accounting Expert Matter? The Association between Audit Committee Directors’ Accounting Expertise and Accounting Conservatism.” Contemporary Accounting Research, 25 (2008), 827–858.Google Scholar
Linck, J.; Netter, J.; and Yang, T.. “The Effects and Unintended Consequences of the Sarbanes-Oxley Act on the Supply and Demand for Directors.” Review of Financial Studies, 22 (2008), 3287–3328.Google Scholar
Minton, B.; Taillard, J.; and Williamson, R.. “Do Independence and Financial Expertise of the Board Matter for Risk Taking and Performance?” Working Paper, Ohio State University (2011).Google Scholar
Moeller, S.; Schlingemann, F.; and Stulz, R.. “Firm Size and the Gains from Acquisitions.” Journal of Financial Economics, 73 (2004), 201–228.Google Scholar
Morck, R.; Shleifer, A.; and Vishny, R.. “Do Managerial Objectives Drive Bad Acquisitions?” Journal of Finance, 45 (1990), 31–48.CrossRefGoogle Scholar
Parrino, R.“CEO Turnover and Outside Succession: A Cross-Sectional Analysis.” Journal of Financial Economics, 46 (1997), 165–197.Google Scholar
Parrino, R.; Sias, R.; and Starks, L.. “Voting with Their Feet: Institutional Ownership Changes around Forced CEO Turnover.” Journal of Financial Economics, 68 (2003), 3–46.CrossRefGoogle Scholar
Perry, S., and Williams, T.. “Earnings Management Preceding Management Buyout Offers.” Journal of Accounting and Economics, 18 (1994), 157–179.Google Scholar
Petersen, M.“Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435–480.Google Scholar
Srinivasan, S. “Consequences of Financial Reporting Failure for Outside Directors: Evidence from Accounting Restatements and Audit Committee Members.” Journal of Accounting Research, 43 (2005), 291–334.Google Scholar
Weisbach, M.“Outside Directors and CEO Turnover.” Journal of Financial Economics, 20 (1988), 431–460.Google Scholar
White, H. “A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity.” Econometrica, 48 (1980), 817–838.CrossRefGoogle Scholar
Supplementary material: PDF

Wang supplementary material

Internet Appendix

Download Wang supplementary material(PDF)
PDF 390 KB