Emerald Management Review:
Financial expertise of directors

Abstract:

Purpose - To reveal the behaviour of financial experts on boards of directors.

Design/methodology/approach - Samples internal and external investment decisions for a panel of 282 firms from 1988 to 2001, focusing on the characteristics of 2,909 insider and outsider directors, against firm characteristics, and on the behaviour of financial experts. Runs regressions for investment sensitivity against cash flow, and bank loan, public debt and external acquisitions characteristics for differently qualified directors.

Findings - Finds that financial experts (such as academics, accountants and bankers) do affect financial decision making. Specifically, shows that commercial bankers reduce the sensitivity of investment to cash flow by easing long-term lending, but only to financially unconstrained firms with poor investment opportunities. Adds that investment bankers are associated with large debt issues and poor takeovers. Notes no evidence of experts controlling performance-related pay or share options.

Practical implications - Argues that a competent financial expert on the board is not necessarily working as envisaged in the interest of the investors.

Originality/value - Provides an excellent antidote to the perceived wisdom that an expert board will act in the shareholders' interests.

Keywords:

Article Type:

Research paper

Reference:

Top