Is Director Industry Experience Valuable?

We investigate whether investor reactions to the announcement of a new outside director appointment significantly depend on the director’s experience in the appointing firm’s industry. We use a sample of 385 outside directors appointed to the board of S&P 500 companies from 2008 to 2010. Our results indicate that companies announcing the appointment of a new director with industry experience exhibit economically and statistically significantly higher announcement re-turns than companies announcing the appointment of a director without such experience. Our results further show that industry experience gained as an inside director drives this result. Experience as an employee without board membership or as an outside director is not associated with significantly higher announcement returns. These results hold when we control for various other director characteristics and financial and corporate governance variables at the firm level. To alleviate endogeneity concerns, we use the deaths of 166 directors holding 229 outside director-ships in listed US firms as an identification strategy. Consistent with the results on appointments, we find significantly more negative announcement returns associated with the deaths of experienced vs. inexperienced directors.