acquisitions that are inevitably complex. Given that CEOs and outside board members both participate and play unique roles in the acquisition process, industry experience of boards should have additive effects on acquisition outcomes, controlling for CEOs’ expertise in the target industry. Furthermore, since strategic decisions are often developed and executed through dynamic processes where top management teams and boards interact, consult, and debate with each other, the effectiveness of experienced boards in performing their advisory functions might be driven by the CEO-board relationship. The nature and complexity of this relationship have been studied extensively, and the literature offers three fundamental perspectives: agency problem (Jensen and Meckling, 1976; Dalton 2007; Boivie 2011), behavioral (Westphal and Stern, et al., et al., 2007; Westphal and Zajac, 2013), and resource provisioning (Kroll 2008; Hillman et al., et al., 2009). Together, these perspectives leave open the question of how directors who are target industry experts engage and influence CEOs with or without target industry expertise, particularly in the context of diversifying acquisitions. We address that in this study. Analysis of 6,178 completed made during 1999-2011 show that 3-day cumulative abnormal announcement returns to the bidders in diversifying acquisitions, controlling for firm and deal characteristics, CEOs’ experience, and year-industry fixed effects, are 1.91 percentage points higher for companies with outside board members who have executive experience in the target industry. This effect is economically meaningful, representing a gain of approximately $192 million of market value. However, CEOs’ experience shows no additive relationship with acquisition performance. This is consistent with outside directors playing the role of (Kroll 2008; Wang 2015) and side” of CEOs’ abilities outweighing et al., et al., “dark the value of their experience. Upon investigation, the joint effect of CEO-board experience
acquisitions that are inevitably complex. Given that CEOs and outside board members both participate and play unique roles in the acquisition process, industry experience of boards should have additive effects on acquisition outcomes, controlling for CEOs’ expertise in the target industry. Furthermore, since strategic decisions are often developed and executed through dynamic processes where top management teams and boards interact, consult, and debate with each other, the effectiveness of experienced boards in performing their advisory functions might be driven by the CEO-board relationship. The nature and complexity of this relationship have been studied extensively, and the literature offers three fundamental perspectives: agency problem (Jensen and Meckling, 1976; Dalton et al., 2007; Boivie et al., 2011), behavioral (Westphal and Stern, 2007; Westphal and Zajac, 2013), and resource provisioning (Kroll et al., 2008; Hillman et al., 2009). Together, these perspectives leave open the question of how directors who are target industry experts engage and influence CEOs with or without target industry expertise, particularly in the context of diversifying acquisitions. We address that in this study. Analysis of 6,178 completed made during 1999-2011 show that 3-day cumulative abnormal announcement returns to the bidders in diversifying acquisitions, controlling for firm and deal characteristics, CEOs’ experience, and year-industry fixed effects, are 1.91 percentage points higher for companies with outside board members who have executive experience in the target industry. This effect is economically meaningful, representing a gain of approximately $192 million of market value. However, CEOs’ experience shows no additive relationship with acquisition performance. This is consistent with outside directors playing the role of (Kroll et al., 2008; Wang et al., 2015) and “dark side” of CEOs’ abilities outweighing the value of their experience. Upon investigation, the joint effect of CEO-board experience
Industry-Experience-of-Board,-CEO,-and-Acquisition-Performance_NZFM.docx