Board Expertise: Do Directors from Related Industries Help Bridge the Information Gap?

Abstract

We analyze the role of “directors from related industries” (<it>DRIs</it>) on a firm's board. <it>DRI</it>s are officers and/or directors of companies in the upstream/downstream industries of the firm. <it>DRIs</it> are more likely when the information gap vis-à-vis related industries is more severe or the firm has greater market power. <it>DRIs</it> have a significant impact on firm value/performance, especially when information problems are worse. Furthermore, <it>DRI</it>s help firms handle industry shocks and shorten their cash conversion cycles. Overall, our evidence suggests that firms choose <it>DRI</it>s when the adverse effects due to conflicts of interest are dominated by the benefits due to <it>DRI</it>s' information and expertise.