The Economics of Director Heterogeneity

• Published in: Financial management Vol. 40; no. 1; pp. 5 - 38
• Main Authors: Anderson, Ronald C., Reeb, David M., Upadhyay, Arun, Zhao, Wanli
• Format: Journal Article
• Language: English
• Published: Melbourne, Australia Blackwell Publishing Asia 01.03.2011; Wiley Subscription Services; Financial Management Association; Blackwell Publishing Ltd
• Subjects: Board of directors; Boards of directors; Business management; Business structures; Censuses; Chief executive officers; Control; Corporate boards; Corporate governance; Cost benefit analysis; Economic aspects; Economic value; Economics; Ethnicity; Firm theory; Herfindahl Hirschman index; Industrial management; Influence; Organizational structure; Proxy statements; Shareholders; Studies; Valuation; United States
• ISSN: 0046-3892; 1755-053X
• DOI: 10.1111/j.1755-053X.2010.01133.x

We investigate the potential costs and benefits of firms constituting a heterogeneous pool of directors relative to more homogeneous boards. We measure director heterogeneity along six separate dimensions and divide board heterogeneity into occupational and social components. Our empirical analysis indicates that corporate complexity and managerial control exhibit significant influence on board heterogeneity. Using the heterogeneity of the county population of the firm's headquarters as an instrument, we also find that investors place valuation premiums on heterogeneous boards in complex firms but discount heterogeneity in less complex firms. Overall, our analysis indicates greater heterogeneity may not necessarily improve board efficacy.