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Does Independent Directors’ CEO Experience Matter?

Author

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  • Shinwoo Kang
  • E Han Kim
  • Yao Lu

Abstract

We find the confluence of CEO-same industry experience makes independent directors particularly helpful in enhancing value-added growth and we identify a channel: guidance toward higher value-added R&D investments and higher quality innovations. Further corroborating these inferences, we find greater improvement in value-added growth when (1) independent directors with industry–CEO experience (IDICEs) have experience in more similar industries; (2) they create more shareholder value as CEO; and (3) they are current CEOs. In addition, IDICEs contribute to value-added growth most when firm environments and characteristics are conducive for active board-management interaction; namely, when product markets are more competitive and dynamic, when outsiders can more easily acquire firm-specific information, and when firms are younger and smaller. Consistent with our inferences on how IDICEs contribute to value-added growth, firms growing faster, less successfully innovating, and/or under strong governance tend to be matched with IDICEs.

Suggested Citation

  • Shinwoo Kang & E Han Kim & Yao Lu, 2018. "Does Independent Directors’ CEO Experience Matter?," Review of Finance, European Finance Association, vol. 22(3), pages 905-949.
    • Handle: RePEc:oup:revfin:v:22:y:2018:i:3:p:905-949.
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    File URL: http://hdl.handle.net/10.1093/rof/rfx023
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    Citations

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    Cited by:

    1. Li, Zhuo & Wen, Fenghua & Huang, Zhijian James, 2023. "Asymmetric response to earnings news across different sentiment states: The role of cognitive dissonance," Journal of Corporate Finance, Elsevier, vol. 78(C).
    2. Xu, Jing & Li, Haizheng, 2023. "Managerial human capital and corporate R&D investment," Journal of Economic Behavior & Organization, Elsevier, vol. 213(C), pages 151-171.
    3. Sun, Liang, 2021. "Does the location of directors' additional positions matter? A new dimension of board structure," Global Finance Journal, Elsevier, vol. 49(C).
    4. Adams, Renée B. & Akyol, Ali C. & Verwijmeren, Patrick, 2018. "Director skill sets," Journal of Financial Economics, Elsevier, vol. 130(3), pages 641-662.
    5. Xiaojing Meng & Jie Joyce Tian, 2020. "Board Expertise and Executive Incentives," Management Science, INFORMS, vol. 66(11), pages 5448-5464, November.
    6. James, Hui Liang & Ngo, Thanh & Wang, Hongxia, 2021. "Independent director tenure and corporate transparency," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    7. Sujata Banerjee & Alessandro Zattoni & Abrarali Saiyed, 2023. "Dominant-owner CEOs, board of directors and firm performance in emerging economies: Exploring the moderating impact of quad-qualified directors," Asia Pacific Journal of Management, Springer, vol. 40(4), pages 1607-1642, December.
    8. Xueman Xiang & Carl R. Chen & Yue Liu & Azhar Mughal & Qizhi Tao, 2024. "Are directors with foreign experience better monitors? Evidence from investment efficiency," Review of Quantitative Finance and Accounting, Springer, vol. 62(2), pages 799-840, February.
    9. B. Espen Eckbo & Knut Nygaard & Karin S. Thorburn, 2022. "Valuation Effects of Norway’s Board Gender-Quota Law Revisited," Management Science, INFORMS, vol. 68(6), pages 4112-4134, June.
    10. He, Zhaozhao & Miletkov, Mihail K. & Staneva, Viktoriya, 2023. "New kids on the block: The effect of Generation X directors on corporate performance," Journal of Empirical Finance, Elsevier, vol. 71(C), pages 66-87.
    11. Kong, Dongmin & Zhao, Ying & Liu, Shasha, 2021. "Trust and innovation: Evidence from CEOs' early-life experience," Journal of Corporate Finance, Elsevier, vol. 69(C).
    12. Alam, Nurul & Boubaker, Sabri & Chen, Xiaomeng Charlene & Hasan, Mostafa Monzur, 2024. "Brand capital and debt choice," International Review of Financial Analysis, Elsevier, vol. 93(C).
    13. Papadimitri, Panagiota & Pasiouras, Fotios & Tasiou, Menelaos & Ventouri, Alexia, 2020. "The effects of board of directors’ education on firms’ credit ratings," Journal of Business Research, Elsevier, vol. 116(C), pages 294-313.
    14. Kim, Taeyeon & Kim, Hyun-Dong & Park, Kwangwoo, 2023. "Customer concentration and firm risk: The role of outside directors from a major customer," Journal of Banking & Finance, Elsevier, vol. 152(C).
    15. Park, Na Young, 2020. "Trust and trusting behavior in financial institutions: Evidence from South Korea," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 408-419.
    16. Marie Lalanne, 2023. "Network‐based appointments and board diversity," Economica, London School of Economics and Political Science, vol. 90(358), pages 409-452, April.
    17. Upadhyay, Arun & Öztekin, Özde, 2021. "What matters more in board independence? Form or substance: Evidence from influential CEO-directors," Journal of Corporate Finance, Elsevier, vol. 71(C).

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