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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
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Abstract

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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 

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