The Impact of Boards with Financial Expertise on Corporate Policies

Abstract

We analyze whether and how board members with financial expertise affect corporate finance and investment decisions. Employing a novel data set of FORBES 500 companies with detailed demographic information on the individual directors of corporate boards from 1988 to 2001, we first investigate whether bankers on the board help firms to overcome financial constraints. We find that the presence of commercial bankers on corporate boards increases the size of loans to the corporation and decreases investment to cash flow sensitivity, particularly when the director’s bank has a lending relationship with the firm. However, the increased access to finance affects mostly firms that have good credit, little financial constraints, and relatively poor investment opportunities, suggesting that banker directors do not act in the interest of shareholders but rather in the interest of creditors. Second, we analyze the impact of investment bankers on the board on a range of activities such as securities issues and mergers. We find that the presence of investment bankers on the board is associated with more frequent outside financing and larger public debt issues as well as poorer stock and earnings performance after acquisitions. The impact of board composition on firm policies is significant after accounting for firm fixed effects and instrumenting for bankers by the number of senior board members. Our findings suggest financial experts on corporate boards do not necessarily improve shareholder value.