Boards Of Directors: The Value of

Industry Experience
Filippos Papakonstantinou
Imperial College London
DRAFT - DO NOT CIRCULATE

Abstract
We construct a unique 10-year panel dataset that contains an experience measure for
the directors of 650 large corporations in the U.S., and investigate the marginal effect
of board experience on firm performance. Our findings are the following: 1) Firms
with more experienced independent directors experience higher abnormal returns and
consistently beat analysts earnings forecasts. 2) They have a lower covariance with
the Fama French HML factor and a lower probability of bankruptcy, as measured by
Altmans z-score. 3) They engage in less earnings manipulation as measured by fewer
negative income restatements and lower accounting accruals. This evidence indicates
not only that board experience has positive marginal monitoring (and possibly advisory)
value, but also that both firms and the market fail to recognize this potential value. Our
results are robust to the use of OLS fixed-effects and Instrumental Variables using lag
transformations as instruments, which, to varying degrees help alleviate concerns that
they are driven by unobserved firm heterogeneity, selection bias, and/or measurement
error. Performing IV estimations that utilize successively deeper lags as instruments,
we find that our results are robust to the presence of some serial correlation in the
disturbance; while testing for serial correlation, we find evidence that it is both limited
in horizon and small in magnitude.

Imperial College Business School, Tanaka Building, South Kensington Campus, London SW7 2AZ, UK,
e-mail: fpapakon@imperial.ac.uk, http://www.imperial.ac.uk/people/f.papakonstantinou. I wish to thank
Anastasia-Aggeliki Andrikogiannopoulou, Markus Brunnermeier, Jiro Kondo, Ulrich Mueller, Darius Palia,
and Joachim Voth for helpful discussions and comments. I also thank seminar participants at Cambridge
University, Columbia University, Imperial College London, London Business School, the London School of
Economics, Michigan State University, Princeton University, the University of Toronto, and Yale University,
for helpful comments.

Introduction

Together with the CEO, the board of directors is the most important entity in the rm. Recognizing this, much empirical research has examined whether board structure is related to rm
performance. These studies, however, primarily focus on board size, independence, and stock
ownership, while data-availability issues have limited the study of another crucial board characteristic: board experience. Experience has featured prominently in the public debate regarding
board structure. In addition, surveys show that CEOs and directors consider board participation in strategic decisions to be important but ineective, due to a lack of experience.1 This
evidence indicates that experience is chosen sub-optimally and has positive marginal value. In
this study we estimate the marginal value of board experience, overcoming the data availability issue by creating a unique database containing detailed past employment information on
individual directors.
We provide evidence that the value of experience is signicant, both economically and statistically. First, we nd that experience increases abnormal returns as estimated by the FamaFrench-Carhart asset-pricing model, and we provide evidence that this abnormal return is indeed
a surprise return rather than compensation for risk not captured by the pricing factors, since
experience also has a positive eect on earnings surprises. This result indicates that the value
of experience is grossly underestimated by the market, and most likely by rms as well. Second,
we nd that experience reduces the returns covariance with the HML factor, which according to
some academics is a proxy for the risk of nancial distress. We show that the negative marginal
eect of experience on the HML loading can likely be attributed to a negative marginal eect
on the probability of bankruptcy within the next year, as forecasted by Altmans z-score. Third
we present evidence that experience signicantly reduces earnings management as proxied by
the amount of accounting accruals and (negative) income restatements in a given year. This
indicates that directors with relevant industry experience are better monitors, and in particular
that the proportion of experienced directors is not chosen optimally with regards to monitoring.
The results we present are economically signicant. For example, according to xed-eects
estimates, we nd that substituting an inexperienced with an experienced director is associated
with a 2:2 percentage point increase in the rms annual abnormal return, representing a surprise
1

See Nadler (2005).

addition of 36 million dollars in value for the median rm in our sample; a 2 percentage points
higher probability of comfortably (rather than just) beating analysts expectations; and a 1:7
percentage points reduction in the probability of a large negative income restatement. Note that
instrumental-variables point estimates are even larger, but also more noisy, yet still statistically
signicant.
It is important to note that the aforementioned results do not provide estimates of the
absolute value of board experience, but rather of its marginal value. As such, they indicate that
rms do not choose their boards optimally, since they can potentially reap large benets by
adding experienced directors. On the one hand, that experienced board members can add value
to the rm would come as no surprise to some, e.g., Rick Edson, CEO of Ucentric Systems, who
said in 2000 that the combined knowledge and industry expertise of the new board members
[was] crucial for his company.2 On the other hand, that any board member can add value to
the rm would come as a surprise to others, e.g., Justin Fox, TIME Magazines business and
economics columnist, who wondered in 2006 Who needs a board of directors, anyway?3 It is
precisely this dierence of opinion and the lack, up to this point, of evidence one way or the
other, that could explain why board experience has positive marginal value in the rst place.
However, we note that potential endogeneity is an issue for this study, as is the case for
most studies of corporate governance in general and boards of directors in particular. Indeed,
we have so far expressed the belief that our results imply that board experience increases rm
value, reduces the probability of bankruptcy, and improves the boards monitoring function. But
alternatively, it could be that board experience is simply correlated with rm characteristics that
themselves cause the observed eects in rm performance. Such a correlation could come about
if, for example, experienced directors have the ability to observe rm characteristics that increase
rm value, and choose to be on the boards of rms that have these characteristics. Or more
simply, it could be that the rm characteristics that cause higher rm value also directly cause
the boards composition. For example, Bertrand and Schoar (2003) nd that better-governed
rms select CEOs with dierent management styles. While it is unlikely that endogeneity due
to governance provisions contaminates our results, since we nd that they are unchanged when
2

See Ucentric Systems Adds Industry Luminaries to Board of Directors, Business Wire, June 19, 2000.
See Who Needs a Board of Directors, Anyway?from the September, 20, 2006 blog of The Curious Capitalist,
Justin Fox, posted on the TIME website.
3

we include in our models the governance index of Gompers, Ishii, and Metrick (2003), other
sources of endogeneity could still pose a problem. We are careful to address this issue in the
following ways.
We conduct the study on a large panel dataset with approximately 650 large US rms and
10 years of observations for each rm. Taking advantage of the panel structure of our data, we
estimate the models using both OLS with rm xed-eects and IV using lag transformations of
the endogenous variables as instruments. Estimation with rm-xed-eects controls for unobserved characteristics that vary across but are xed within rms, and therefore alleviates some
but not all endogeneity concerns. Estimation by instrumental-variables on the other hand is
consistent in the presence of endogeneity caused by both xed and time-varying heterogeneity
within rms, but only to the extent that the instruments are truly exogenous.
Given the large number of potentially endogenous regressors, i.e., all board characteristics,
and the absence of universally accepted instruments, we exploit the panel-structure of the dataset
in order to construct instruments using lags of the endogenous variables. For each endogenous
regressor we dene its instrument as the lagged level minus the lagged sample average. Subtracting the lagged sample average of the endogenous variable removes the endogeneity due to
xed rm heterogeneity, under the intuitive assumption that this endogeneity is time-invariant.
Using the lag level of the endogenous variable removes the endogeneity due to time-varying rm
heterogeneity, under the more debatable assumption of limited in terms of horizon and/or
magnitude serial correlation in the observation-specic disturbance. Serial correlation in accounting variables often implies that the use of lagged endogenous regressors as instruments is
not ideal in corporate nance applications. However, it is less of a problem in our study since
the main measures of performance that we use, i.e., abnormal return and HML loading, are not
accounting measures, while even some of our measures that are based on accounting variables,
e.g., earnings surprises, restatements, and accruals, are not highly correlated.4 Having said this,
we deal with the potential endogeneity in the instruments caused by serial correlation in the
disturbance as follows. We perform IV estimations that use successively deeper lags as instruments, and we test for the presence of serial correlation at various horizons. We nd evidence
that correlation in the disturbances is limited in horizon and small in magnitude, and that our
4

For example, in our dataset the serial correlation in a typical accounting variable like EBITDA is 0:975, while
in abnormal return and HML loading it is 0:012 and 0:064, respectively.

results are robust to using dierent levels of lags as instruments.

In addition to our main analysis, we estimate as a robustness check conditionally linear
quantile regressions to investigate how experience aects the whole distribution of the dependent
variables. In most cases we nd that experience exerts a pure location shift on the conditional
distributions. This evidence provides some reassurance that the least-squares coe cients do an
adequate job of describing the eects of experience for the whole range of the distribution of the
dependent variables, and therefore are applicable to most rms.
We overcome the lack of data on individual directors employment as follows. We parse
biographies of individual directors from proxy statements, and extract useful information on
directors past employment, e.g., employer, period of employment, and position held, in order
to construct a measure of experience. While the data allows us to explore alternative denitions
of experience, in the current study we focus on one measure: A dummy variable indicating
whether the director has relevant industry experience. Furthermore, we focus on the experience
of independent directors, i.e., directors who have no personal or business relationship with the
rm, rather than the whole board, for two reasons. First, inside directors are often assumed
to be, and always are by our denition, experienced. Second, outside directors who are not
independent, called outside-related directors, serve on boards relatively infrequently: Little over
than half the rms in our sample have outside-related directors, and even then they have an
average of two outside-related versus an average of six independent directors. To avoid reducing
our sample size in half, we group inside and outside-related directors together, and calculate
a measure of experience for this group of a liated directors, rather than a separate measure
for each sub-group. Our results are unchanged when instead we group outside-related directors
together with independent directors or when we leave outside-related directors out of the analysis
altogether.
In the next section we provide a brief review of the relevant literature. In Section 3 we
present the data sources and the process with which we extract the information necessary to
construct the measure of industry experience. In Section 4 we present the estimation problems
that arise in our study and the econometric methodology we use to deal with these problems.
In Section 5 we present our results.

Literature Review

A large empirical literature is concerned with the marginal value of board composition. These
studies can be distinguished along three axes: on the basis of the board characteristics they
focus on, on the basis of what eects e.g., the eect on overall performance or on discrete
board tasks they examine, and on the basis of the empirical methods employed to study these
eects.
While it is easiest to present the literature by following the rst of these dimensions, it is
important to keep in mind the dierences along the other two dimensions. First, as Bhagat and
Black (1999) point out, there are two ways to study the marginal value of board composition:
to examine the eect of board composition on specic events such as M&As, and to examine its
eect on overall rm performance. The former approach is valuable in that it can shed light on
the specic ways in which particular board characteristics can add value, and the latter approach
is valuable in that it can inform us regarding the net eect on rm value. In our study we follow
a combination of the two approaches, in that we look at the eect of board characteristics on
performance measures such as alpha, but also on how they aect the forecasted probability of
going bankrupt and their eect on earnings manipulation. Second, as Hermalin and Weisbach
(2003) point out, an important issue that casts doubt on the validity of many studies on board
characteristics is that board composition is endogenous, due to unobserved rm heterogeneity
and/or reverse causality. Some authors have tried to partially correct for this endogeneity
by using industry- or rm-level xed eects to account for unobserved heterogeneity that is
xed within the industry or the rm, respectively. Others have attempted to use instrumental
variables to deal with more general forms of endogeneity. In our study we present results based
on OLS with industry- and rm-level xed eects, as well as IV estimations, in an eort to
deal with a broad spectrum of endogeneities. In what follows, we present some results from the
literature, with specic mention to the methodology used by each.
Most of the empirical research thus far has studied the importance of three specic aspects
of board composition: board independence, board size and directorsstock ownership. In this
sense, the current study is almost orthogonal to the past literature, since there is little work
that examines the marginal eects of board experience. The most relevant paper is recent work
by Guner, Malmendier, and Tate (2006), who utilizing rm xed eects and IV estimation nd
5

little evidence that nancial expertise matters for specic policies like nancing, investment,
and compensation when conicts of interest are absent. In fact, the authors nd that in the
presence of conicts of interest nancial experts aect corporate decisions in the interest of the
nancial institutions that employ them. In contrast to this papers narrower focus on nancial
expertise, the focus of our paper is industry experience, which can be useful in both strategic
and nancing decisions, and can generally enable board members to more competently perform
their advisory and monitoring roles.
Even though board experience is the focus of our analysis, our study also contributes to the
literature on board independence and size. Board independence is probably the most widely
discussed topic in the corporate board literature. Most studies have estimated single OLS equations and found that board independence has no signicant eect on rm performance, proxied
by either accounting measures (MacAvoy, Cantor, Dana, and Peck (1983), Mehran (1995),
Klein (1995)), or market measures of performance (Hermalin and Weisbach (1991) and Bhagat and Black (2000)). Chaganti, Mahajan, and Sharma (1983) study the dierence in board
independence between failed and non-failed rms and nd no correlation between outside directors and bankruptcy likelihood. Other studies that estimate OLS regressions report that
board independence has a signicant positive eect on rm performance (Baysinger and Butler
(1985),Schellinger, Wood, and Tashakori (1989)). Byrd and Hickman (1992) and Cotter, Shivdasani, and Zenner. (1997) study tender oer bids and show that majority-outsider boards have
a positive eect on acquirer premia. Subrahmanyam, Rangan, and Rosenstein (1997) nd the
opposite tendency for bank acquisitions. In more econometrically sophisticated studies, Hermalin and Weisbach (1991) and Bhagat and Black (2000) use lagged levels as instruments for
endogenous variables and nd no signicant relationship between board independence and rm
performance, while Agrawal and Knoeber (1996) and Brick, Palia, and Wang (2006) use IV
together with rm xed eects and document a negative and positive, respectively, relationship
between board independence and rm performance. The general conclusion from this literature
is that the evidence on board independence is decidedly mixed.
Our ndings regarding board independence are mostly statistically insignicant, potentially
indicating that rms choose the frequency of independent directors optimally. The only exception to this rule is that we nd weak evidence that independence has a positive eect on income

restatements, i.e., it has positive marginal monitoring value.

Studying board size Lipton and Lorsch (1992) and Jensen (1993) suggest that, even though
larger boards might potentially be better monitors, they are eectively worse monitors. The
reason is that coordination problems, free-riding issues, and other such impediments to the
eective functioning of the board increase as the size of the board increases. The evidence
in favor of this hypothesis is presented by Yermack (1996) and Brown and T.Maloney (1999).
Yermack (1996) nds in an 8 year panel dataset of 500 large US rms that board size is
correlated with smaller Tobins Q, as measured by the market value over the replacement value
of a rms assets. This result is robust to estimation with rm xed-eects and to IV estimation
using lagged values of board size as instruments.Brown and T.Maloney (1999) nd that larger
board size is associated with lower stock price returns to acquiring rms in takeovers. On the
other hand, Bhagat and Black (1999) show that the negative relationship between board size
and performance is not robust to the choice of performance measure. In a recent study Boone,
Field, Karpo, and Raheja (2007) introduce instrumental variables for both board independence
and board size together with industry xed eects and nd that board independence and size are
aected by a broad combination of rm-specic and managerial characteristics, indicating that
board composition endogenously arises from the rms competitive environment. Therefore any
attempt to enhance the rms value by changing the board composition is unlikely to succeed.
Our ndings regarding board size are generally weak and/or mixed, depending on what estimation method is used. In general though, we nd weak evidence that size has a negative eect
on the HML loading, a negative eect on accruals, and a positive eect on income restatements.
This evidence would imply that board size has a positive monitoring value in the margin, though
this does not seem to translate to observable improved rm performance; we are unaware of any
other studies presenting results that relate board size and earnings management.
Finally, regarding director stock ownership, it has been suggested that directors with high
proportions of ownership are more eective monitors. Morck, Shleifer, and Vishny (1988) nd a
signicant relationship between director ownership and Tobins Q and Hermalin and Weisbach
(1991) conrm this result. Due to data limitations we do not report any results regarding stock
ownership by CEOs and directors. Using a smaller sub-sample for which we have stock ownership
data, however, we have checked that our results are robust to their inclusion in our analysis.

Data

3.1

Extraction of Experience Information

A crucial part of this study has been the extraction of past employment information for directors
from their biographies, which enables us to construct a metric of relevant experience for each
director-rm match, and possibly other interesting experience measures in the future. This data
extraction enables us to conduct up-to-now infeasible studies that make use of directorsspecic
experience and knowledge, rather than simply making use of general professional information
such whether a director has a background as a corporate executive or an investment banker.
What makes this data extraction even more important is that it has been applied on a large
panel dataset, which allows studies with higher accuracy and external validity than a case study
would.
The starting point of the data extraction project are the biographies, one of which is presented
below for illustration purposes (with identifying and employment information altered for privacy
reasons):
Mr. Smith has been Chief Executive O cer of International Business Machines
Corp. since February 2000 and President since April 1999. He is also a director of
Johnson Equipment. Smith was Vice President at PAR Technology Corp from 1995
to 1997. From 1994 to 1995, Smith was Vice President at Superphase Technology,
Inc. Prior to joining Superphase, he was employed by Microsoft from 1984 to 1994
in a number of sales and technical positions.
A brute-force approach to extracting past employment information from biographies like
these is to process all biographies by hand. Given that the database contains about 20; 000
unique biographies this approach would require at least a years worth of tedious full-time work.
Instead we decided to rst process the biographies with the help of a computer program,
and then to clean the data manually. For this purpose we developed a program written in C,
which successively takes as input each of the biographies and performs the following tasks. First,
it breaks down the biography in sentences, a seemingly mundane though in reality somewhat
complex task for a program, due to the fact that many company names and other abbreviations

contain periods, making the mechanical identication of sentence separators di cult. Afterwards, the program matches all words in each sentence against a list of all public companies
tracked by CRSP and/or Compustat. This list of companies is carefully constructed so that
it contains each company name in all the possible ways in which it can appear in a biography. In the above example, the program keeps the sentences referring to International Business
Machines Corp, PAR Technology Corp, and Microsoft, all public companies, and discards the
sentences referring to Johnson Equipment and Superphase Technology, both private entities.
The reason for restricting attention to these companies is twofold: First, the criterion of being
employed in a public company provides a basis of comparability across employments; Second,
only employment in a public company can be meaningfully used in an empirical study, since
otherwise we have no information regarding, e.g., the industry in which the rm operates, etc.
Having identied which sentences of the biography contain information on public companies,
we discard the remaining sentences and successively process the ones retained. The program
matches all words in each sentence against a list of position titles, e.g., CEO, Chief Executive
O cer, COO, etc. Finally, it searches for year information, which can be used to develop
ner measures of experience that make use of the number of years of experience a director has
in specic areas.
The nal output from the program for the above sample biography looks as follows:
Company
International Business Machines
PAR Technology Corp
Microsoft

Positions Held
Chief Executive O cer
Vice President

President

Year Start
1999
1995
1984

Year End
2000
1997
1994

Clearly, the program output is not completely error-free. In this particular case, the output
indicates that the named director served as Chief Executive O cer and President of International
Business Machines from 1999 to 2000, when in fact he served as Chief Executive O cer from
2000 and as President from 1999, both positions which he has held until the year referred to in
the observation in which this biography was contained. This and other potential errors in the
program output have been cleaned manually.
To convert the information the program (and subsequent manual processing) outputs to
a usable format, we merge the company names back with company identifying information,
9

CUSIPs, from Compustat, and hence are able to retrieve information such as the industry in
which the rm operates.
We create our measure of experience as follows. For each rm, for each year, we retrieve
from the Compustats Business Information database all the industries (dened at the 2 digit
SIC level) in which the rm operated in during the year, and we create a set of dummy variables,
one for each of the 23 industries as dened in Barth, Beaver, Hand, and Landsman (2004) that
indicate whether the rm operated in that industry during the year.5 Then, for each director,
we create a corresponding set of industry dummy variables that indicate whether the director
has been employed in the past by a rm that, during the period of his employment, operated
in that industry. Subsequently, for each rmdirector match, for each year, we create a dummy
variable that is set equal to 1 if there is any overlap between the rms industry dummies for
that year and the directors industry dummies, and to 0 if there is no overlap. Finally, the
experience measure is average over all directors on the rms board.
It should be noted here that the data we have extracted could be used to create much more
nuanced denitions of experience, e.g., measures based on the average performance of the rms
in which a director has been employed in the past, or measures that value employment in top
executive positions more highly than employment in less inuential positions, etc. While we
plan to pursue these ideas in future research, they are outside the scope of the current study,
where we limit ourselves to the aforementioned measure of relevant industry experience.

3.2

Data Sources

The universe of rms and years we use in this study is determined by the intersection of two
databases with information on individual directors: one by the IRRC, and one by the Corporate
Library. The former has coverage from 1995 through 2005, and the latter from 2001 to 2006.
From these datasets we obtain information regarding the total number of board members in each
company, as well as the age, and a liation insider, related outsider, or independent outsider
of each individual director, including the CEO who is always a member of the board. The
reason we use the intersection of these databases is that the Corporate Library dataset has the
unique feature that it contains a eld containing a short biography for each director, retrieved
5

Note that our results are robust to dening the measure of experience using the 48 industries as dened in
Fama and French (1997).

10

from the rms proxy statement. As has been mentioned above, we utilize these biographies to
extract past employment information for each director, in order to compile a metric of relevant
experience for each director-rm match. As a result, by including in our dataset rms that are in
both databases we dramatically reduce the number of directors for whom we need to manually
nd biographies, thanks to the slow rate at which boards of directors change. Our nal dataset
contains information on 650 companies and their directors, with an average of 10 years worth
of observations for each.
We draw the additional data utilized in this study from several sources. From the Compustat
Industrial Annual database we obtain accounting data such as book value of long-term debt and
assets, capital expenditures, sales, collateral (dened as the total value of inventories and the
net value of property, plant, and equipment, divided by the book value of assets), EBITDA, and
free cash ows (dened as EBITDA less capital expenditures).
From Compustats Business Information database we get specic information for the number
of segments and corresponding industries in which each rm operates. This information is
utilized in the construction of the measure of relevant experience, since the measure is based
on segment-level information, rather than simply on the primary industry in which each rm
operates.
From CRSP we obtain daily and monthly returns, prices, and shares outstanding information,
all of which are adjusted for stock splits. Prices and shares outstanding are used to calculate
market capitalization, while returns are used to estimate loadings on risk factors.
From Compustats Executive Compensation database we obtain information on the boards
compensation, including the annual retainer and the value of stock and options given to each
member of the board.
We obtain the time series of daily and monthly returns for the Fama French factors Smallminus-Big (SMB), High-minus-Low (HML) and the Carhart momentum factor Up-minus-Down
(UMD) from Kenneth Frenchs website.
Finally, from the I/B/E/S database we obtain information on analysts estimates for each
companys quarterly earnings, as well as the actual quarterly earnings reported by the companies.

11

Methodology

In this section we present the various methodologies that we use in our analysis. Our aim in this
study is to estimate the marginal eect that board characteristics have on rm performance.
We examine the eect of board experience, size, and independence (with a special focus on
experience) on such measures of performance as the alpha and factor loadings of raw returns
in the Fama-French-Carhart asset-pricing model, earnings surprises, return on assets, and the
forecasted probability of nancial distress, as well as on measures of earnings manipulation like
accruals and income restatements. In this section we discuss the methodological issues involved
in such a study, in particular endogeneity issues, and how we attempt to resolve them.
First we expound on the endogeneity issues that plague the literature on corporate governance. Then we present an econometric model of potential endogeneities, which allows us to
argue formally whether we need instrumental-variables estimation, and if the instruments we
choose are valid and exogenous. Subsequently, we prove that, under our assumptions, our instruments satisfy the necessary conditions for consistency of the IV estimator, and we describe
statistical tests that provide evidence that our assumptions and results regarding the instruments
are correct.

4.1

Endogeneity of Board Characteristics

It is widely acknowledged that empirical studies analyzing the eect of board characteristics on
rm performance are potentially plagued by endogeneity issues caused by xed or time-varying
unobserved rm-heterogeneity. The reason is that, presumably, rms choose board characteristics optimally, and therefore rms attributes observable or not might simultaneously
determine the characteristics of the board as well as the performance of the rm. It is important to note that unobserved rm-heterogeneity is very general and can include such sources of
endogeneity as industry participation, rm culture, CEO quality and ability, signaling motives,
etc.
As Hermalin and Weisbach (2003) point out, the presence of this type of endogeneity in
these studies not only biases estimated coe cients as all types of endogeneity do but in
addition necessitates a careful interpretation of the results. Finding, for example, that high
board experience is associated with high stock market returns could be interpreted in one of
12

two ways. On the one hand, it could be that some unobserved rm attribute, e.g., having many
new investment opportunities, causes rms to optimally choose experienced directors as well as
to experience high returns. In this case, the observed relation between board experience and
stock returns is an in-equilibrium eect, and it would be wrong to infer that board experience
is causally related to returns. On the other hand, it could be that there is no such unobserved
attribute that causes both board experience and returns, in which case the observed relation
would be an out-of-equilibrium eect, and it would be correct to infer that rms could increase
their stock returns by increasing the number of experienced board members. We note that a
caveat to this out-of-equilibrium interpretation is that though it is unlikely, it is not inconceivable
that CEOs collude with the board to engage in activities that do not necessarily maximize the
rms value and that, even though shareholders know that increasing, say, board experience
increases rm value, they are not capable of changing the CEO, the board, or the corporate
governance structure in general, in order to force CEOs to take advantage of this opportunity.
Indeed, under these circumstances the market would be in equilibrium, but in any case, it would
still be true that if rms could increase the number of experienced board members, then stock
returns would increase, and ultimately, this is the type of result that interests us, not whether
strictly speaking the market is in equilibrium or not.
In addition to the aforementioned source of endogeneity, our study in particular potentially
suers from endogeneity caused by measurement error in the measure of experience. We measure
experience with error for two reasons. First, we have not been able to obtain a biography for all
directors on all rms in the dataset, and as a result the measure of experience we calculate for
each rm-year is based on incomplete information. Second, the computer program that parses
the biographies produces output that is not completely error-free, since it sometimes misses or
incorrectly matches company names in the biographies with the master list containing the names
of all public companies tracked by Compustat and CRSP. Having said this, it is important to
note two things. First, endogeneity due to measurement error leads to attenuation bias, i.e., it
biases estimated coe cients towards 0 and hence away from our interesting results. Second, we
believe that the amount of missing and/or incorrectly matched information is small and hence
the attenuation bias minor, since on the one hand we have individual director biographies for
90 percent of individual directors, and on the other hand we have made a concerted eort to

13

minimize matching errors by optimizing the computer code and manually cleaning the computer
output.
Another source of bias from which most empirical studies in nance potentially suer, is
survivorship bias. This bias arises in empirical models that try to explain rm performance,
because to be included in the regression rms must survive a certain amount of time. The
potential bias is more severe in studies that dene performance over longer horizons, e.g., ve
years, and less severe though still present, in studies that focus on yearly performance measures. To assess whether survivorship bias aects the results, one needs to assess whether the
independent variables, e.g., rm or board characteristics, are related to the survivorship bias
in performance: coe cient estimates for independent variables that are positively (negatively)
related to the survivorship bias in performance will be positively (negatively) biased. In this
study we focus exclusively on yearly performance measures, hence we limit the potential eects
of survivorship bias. In addition, even if coe cient estimates are biased by the probability of
survival, we can actually anticipate the direction of the bias by looking at the results from the
estimation of forecasted bankruptcy probabilities in Table 9. We can see from these results that
our main variable of interest, the experience of independent directors, is positively related to the
probability of survival, and therefore we expect all our results on board experience to actually
be stronger than the ones we nd, at least to the degree that survivorship bias matters.

4.2

Econometric Model

We summarize the preceding discussion and relate it more concretely to our empirical analysis
as follows: We suspect that all the board characteristics experience and age of a liated
and independent directors, board size, and board independence we include in our analysis
potentially suer from endogeneity due to unobserved rm-heterogeneity, while to a lesser degree
we also suspect that experience potentially suers from measurement-error bias.6 This situation
can be described by the econometric model
0
yit = z0it + wit
+ "it .

(1)

6
Note that though this bias might also contaminate to a smaller degree the estimated coe cients of the other
independent variables, we do not believe it aects our results. First, as was mentioned above, we have a prior
that the measurement error is not particularly large. Second, we will show below that the null hypothesis of
exogeneity for the experience measures cannot be rejected, which oers statistical support to our prior.

14

yit is the dependent variable of interest in each estimation, e.g., the alpha of the rms stock
from a multi-factor model, the level of earnings surprises, etc. "it = ai +
where ai is xed unobserved rm-heterogeneity and

it

is the disturbance,

it

is observation-specic error that may

contain time-varying unobserved rm-heterogeneity. w and z =

z01 z02

are the exogenous

and endogenous regressors respectively, i.e., E [wit "is ] = 0 8s; t and E [zit "it ] 6= 0. Note that we
have separated z1 from z2 , the former denoting the experience measures which can suer from
measurement-error bias, the latter denoting the other board characteristics.
We consider three possibilities regarding the endogeneity of z: If all elements of z are endogenous only with respect to a then we have E [zit ai ] = E [zis ai ] 6= 0 and E [zit

is ]

= 0 8s; t.

If z2 is endogenous only with respect to a and z1 is also endogenous with respect to , due to
measurement-error bias, then we have instead that E [z1it
are also endogenous with respect to

it ]

6= 0. Finally, if all elements of z

then we have instead that E [zit

it ]

6= 0. In the rst case

we can solve the endogeneity problem by using a traditional xed-eects estimator, while in the
other two cases it is necessary to use an instrumental-variables estimator with instruments for
the endogenous regressors.
The reason that we dierentiate between these three possibilities regarding the endogeneity
of z is that we want to test two hypotheses: that unobserved rm-heterogeneity is mostly xed
and that measurement-error bias is negligible. It is important to nd out if there is any statistical
support of these hypotheses: If there is, then we need to place gravity on the results from both the
xed-eects and the instrumental-variables estimations; if there is not, then we need to conne
our attention to results from the latter. In Section 4.4.3 we present separate Wu-Hausman
tests that reject neither the hypothesis that all board characteristics are exogenous, nor the
hypothesis that experience measures are exogenous, thereby indicating that xed-eects should
be considered alongside instrumental-variables estimation. However, it is important to note the
following. First, the statistical tests of the aforementioned exogeneity null hypotheses require
the existence of exogenous instruments. Second, while the tests can be considered indicative,
they are in no way conclusive.
Next, we present the instruments that we use in our analysis.

15

4.3

Instruments

We have six potentially endogenous regressors experience and age of a liated and independent
directors, board size, and board independence and we need to nd at least one valid, strong,
and exogenous instrument for each of them. Unfortunately, in the words of Roodman (2007),
not all studies have excellent instruments waiting in the wings, especially not for as many
endogenous variables as the current study would require. In addition, whether an instrument is
considered to be good or not is often a matter of taste and seldom a unanimous assessment.
As a result, we have chosen to exploit the panel structure of our dataset and utilize internal
instruments, i.e., instruments that are based on lags and transformations of the endogenous
variables themselves.
To proceed, we need to make a couple of additional though weak assumptions on the
econometric model, which we actually test and do not reject in our data. First, let

have

limited (or no) serial correlation, i.e., it is a covariance stationary process whose j th order
autocovariance is

with

= 0 for j > p. In addition, assume that z has at least some

persistence, i.e., it is a covariance-stationary process whose j th order autocovariance is

with

non-singular, for j at least up to q > p + 1. This assumption is clearly true for z

representing board characteristics, since only a small fraction of the board changes from year to
year.
Note that the endogeneity of z coupled with the persistence in
for t

But E [zis

s
it ]

implies that E [zis

t; and coupled with the persistence in z it implies that E [zis

= 0 for 1

s < t

it ]

it ]

6= 0

6= 0 for t < s.

p, and it is this orthogonality that forms the basis of our

instruments. Dene the instruments

xp+k
= zit
it
for 1

p k

p. Note that due to the persistence in

k+1

tX
p k

(2)

zis

s=t q

s<t

p+k
and s > t cannot be used in these instruments. We want to show that xit
with 1

k <

k<q

and z respectively, zis with t

p satises the identication and exogeneity conditions necessary for instrumental variables

estimation to be consistent.

i
h
0
For identication we want to show that E xp+k
z
it is full-column rank. From covarianceit
16

h
i
p+k
0
stationarity we have E [zit ] = E [zis ], which implies that E xp+k
z
, and
it = Cov zit ; xit
it
so

0
xp+k
it zit

= Cov zit ; zit

= Cov (zit ; zit

p k

p k)

p
1

p+1

k+1

k+1

q
X

k+1

tX
p k

zis

s=t q

tX
p k

Cov (zit ; zis )

s=t q

j,

j=p+k

which is full-column rank as long as the autocovariances of z die out fast enough.
In addition, the instrument is exogenous because

xp+k
it "it

= E

"

zit

= E [zit

1
p k

k+1

k ai ] + E [zit

it ]

p k

tX
p k

= 0,
where we have used that E [zis

it ]

= 0 for 1

zis

s=t q

s<t

"it

1
t

k+1

tX
p k

(E [zis ai ] + E [zis

it ])

s=t q

p and E [zis ai ] = E [zit ai ] 8s; t. The latter

assumption makes sense, in that we would expect the xed eect to have a xed correlation
with the endogenous variable through time. For example, let the xed eect ai represent the
participation of rm i in some industry; we would expect participation in the industry to have a
xed eect through time on the optimal choice of the endogenous variable, e.g., board experience.
If not, for example participation in the same industry requires an increasingly higher number of
experienced directors through time, then we could re-interpret participation in this industry as
a time-varying eect, since eectively the true characteristics of the industry in which the rm
participates are not xed.
While we could theoretically use q

1 instruments of the proposed form, we restrict

ourselves to two: xp+1

and xp+2
it
it , which are based on the rst and second available lags, as
allowed by the serial correlation in the disturbance term. The reason for this is that there is a
trade-o between lag length and sample depth, in that the more instruments based on long lags

17

we use, the more observations we need to drop from the dataset (unless we were to resort to
zeroing out observations, which we prefer not to do). Given that we have a relatively short panel
with an average of 10 observations per rm, it appears prudent to limit the lag length to two.
However, all the models have been estimated using up to four instruments for each endogenous
variable, i.e., xp+j
for 1
it

4.4

4, and our results are even stronger than when we use 1

2.

Statistical Tests for Instruments

In this section we present the following. First, we present tests for serial correlation in the
error, which allow us to determine which of the instruments we proposed above should be
endogenous and which exogenous. Second, we discuss further statistical tests for exogeneity as
well as identication of the instruments. Third, we perform Wu-Hausman tests to determine
whether the board characteristics, all of which have been assumed to be potentially endogenous
with respect to the observation-specic error, are indeed endogenous or not. This test helps us
decide whether xed-eects estimation has any merit. Fourth, we perform Hausman tests to
determine whether xed-eects and random-eects estimates are signicantly dierent, thereby
determining whether the board characteristics are endogenous with respect to the xed-eect.
All the aforementioned tests are performed and presented separately for each of our models.
4.4.1

Tests for Serial Correlation in "it

As we mentioned earlier, it is important to test for serial correlation in the errors, because the
P
presence of correlation between "t and "t p (and periods in between) makes zit j q 1j+1 ts=tj q zis
P
p+k
for 1 j p endogenous, and so we need to utilize instruments xit
= zit p k q p 1 k+1 ts=tp qk zis

with k

1. To test for serial correlation in the errors, we successively test whether the rst-

dierenced error at time t, "it "it

"it

p 1

"it

p 2,

for 1

1,

is correlated with the rst-dierenced error at time t p 1,

pmax , where we arbitrarily choose pmax = 3. Note that we need

to test for correlation in the dierenced errors because, due to the xed-eect ai , there is correlation in the levels; if we nd correlation with the p + 1 lagged dierenced error, then we
know that there is correlation with the p lagged level error. Also note that we do not test
for correlation for p = 0, due to the mechanical correlation between the contemporaneous and
rst-lagged dierenced error.

18

To perform the test, we follow Wooldridge (2002) and regress "it

through "it

p 1

"it

p 2

"it

on "it

"it

as well as all the regressors in the model given by Equation (1) due to

potential endogeneities, clustering by rm since we have a panel dataset, and then we perform an
F test on the coe cient of "it

p 1

"it

p 2.

We perform this procedure starting with p = pmax

and working our way towards p = 1. We report the results from these tests for 1

pmax

in the diagnostics reported at the bottom of each GMM estimation in Tables 5 through 16.
We use the results of these tests as follows. For each model we perform three GMM estimations: one using instruments x1it and x2it , one using instruments x2it and x3it , and one using
instruments x3it and x4it .7 If the GMM estimation that uses instruments xjit and xj+1
generates
it
residuals in which the test for correlation with p

j fails, then our condence in the results

from this estimation is reduced. However, we would advise against blindly following this rule,
because there is a cost to using very deep lags to construct the instruments, and indeed, even if
the error is serially correlated, the magnitude of the endogeneity with the proposed instruments
depends on the magnitude of the serial correlation, which is generally estimated to be small.
4.4.2

Tests for Instrument Exogeneity and Identication

While we have argued that the instruments we employ satisfy the identication and exogeneity
assumptions necessary for the instrumental-variables estimation to yield consistent coe cient
estimates, now we discuss three statistical tests that supplement these theoretical arguments: A
test for under-identication, a test for weak instruments, and a test for instrument exogeneity.
The results from these tests are presented in Tables 5 through 16, at the bottom of each column
that corresponds to IV estimation.
The test for under-identication is a test of whether the equation is identied, i.e., under
the null hypothesis that the equation is under-identied, the matrix of reduced form coe cients
on the excluded instruments has one less than the number of endogenous regressors. Given
that in our estimations we cluster standard errors, hence allowing for non-independence of the
error terms within a group, the appropriate test for under-identication of the instruments is
7

Note that for some models, in particular the ones in Tables 5, 8, 10, 11, and 12, due to space constraints we
cannot present results from all the GMM specications we perform. As a result, we always present the specication
that uses instruments x1it and x2it , and we also present the specication that uses instruments x2it and x3it or the
one that uses instruments x3it and x4it , whichever we deem to be more appropriate in each case, according to the
results from the serial correlation tests.

19

the Kleibergen and Paap (2006) rk statistic, which is distributed

with L0

K 0 + 1 degrees

of freedom, where L0 is the number of excluded instruments and K 0 the number endogenous
regressors. In all our models we nd that the null hypothesis of under-identication is rejected.
We can see in the diagnostics reported at the bottom of each GMM estimation in Tables 5
through 16, that the null of under-identication is rejected in all our estimations. Sheas (1997)
partial R2 and the rst-stage regression F test corroborate this result for all estimations but
are not reported for the sake of brevity.
Weak identication arises when the equation is nominally identied, but the correlation
between regressors and instruments is low. The relevant statistic for the weak-identication test
when non-independence of the error terms within the group is allowed, is the F version of the
Kleibergen and Paap (2006) rk statistic with (N

L) =L0 degrees of freedom, where N is the

sample size, L is the number of exogenous instruments, and L0 is as before. While critical values
for this test are not available, we can see in the diagnostics reported at the bottom of each GMM
estimation in Tables 5 through 16 the values that the statistic takes: it is between 6:00 and 7:00
for models that use p+k = 1 in Equation (2), between 1:50 and 2:00 for models that use p+k = 2,
and around 1:00 for models that use p + k = 3. While values between 6:00 and 7:00 are relatively
high, values below 2:00 are somewhat low. To further investigate whether the potentially weak
instruments pose a problem, we estimate our models using the Limited Information Maximum
Likelihood (LIML) procedure, which according to Stock and Yogo (2002) performs better in the
presence of weak instruments than the two-step e cient GMM estimator. We nd that in all our
models the estimated coe cients and signicance levels under the two procedures are very close
to each other, which is further indication that our results are not driven by weak instruments.
To test for the exogeneity of the instruments we employ the Hansen J test for overidentication, which proposes that under the null that the instruments are exogenous, the distance
function J of the GMM estimator has a

distribution with L

K degrees of freedom, where

L is the number of included and excluded instruments and K the number of parameters to be
estimated. Unfortunately, there are several caveats regarding the use of the Hansen J test in
order to test whether the chosen instruments are exogenous. First, the test has the proposed distribution under the null hypothesis that there exists a consistent estimator of S, the asymptotic
variance of xit "it ; as a result, the test has the proposed distribution only when we already have

20

a full set of exogenous instruments, and in essence tests if the additional instruments are also
exogenous. This means that a failure to reject the null does not really mean that the instruments
are exogenous, but could also possibly mean that we do not have a consistent estimator for S.
Third, without going into any detail, the Hansen test is not consistent against some patterns of
failures of the orthogonality conditions. Finally, the Hansen test is a joint test of the exogeneity
of the instruments as well as the model restrictions, and hence rejection does not necessarily
mean that the instruments are not exogenous.
Flawed as the Hansen test is, it is the only objective criterion of whether instruments are
exogenous, and therefore we do report it. We can see in the diagnostics reported at the bottom
of each GMM estimation in Tables 5 through 16, that the null hypothesis of exogeneity of the
instruments is accepted for all our models, a result that lends some statistical support to our
theoretically-informed belief that the instruments are indeed exogenous.
4.4.3

Tests for Endogeneity of Board Characteristics

Even though we suspect that board characteristics might be endogenous, we perform some
statistical tests of this hypothesis, to gain insight into which estimator is more appropriate: xed
(or random eects) or instrumental-variables. We begin by testing separately the following two
null hypotheses: rst that all board characteristics are exogenous with respect to the observationspecic error, i.e., that E [zit

is ]

= 0 8s; t; and second that, assuming that board characteristics

other than experience are exogenous with respect to observation-specic error, the same is true
for experience, i.e., that E [z1it

is ]

= 0 8s; t.

The statistical test we perform is the Wu-Hausman test (see Hausman (1978)). In the rst
stage we regress all the potentially endogenous variables on all the exogenous variables (including
the instruments), and in the second stage we include the residuals from the rst-stage regressions
in our xed-eects model. The statistic is distributed F (K 0 ; N

K), where N is the number of

observations, K is the number of parameters to be estimated, and K 0 is the number of potentially

endogenous variables.
We can see from Tables 3 and 4 that the Wu-Hausman test accepts for almost all of our
models the hypothesis that all board characteristics are exogenous, as well as the hypothesis
that experience is exogenous given that the other board characteristics are exogenous. The only

21

case in which the latter hypothesis is rejected is the model in which the dependent variable is
Altmans z-score. As a result, in this model we would tend to place less emphasis on the results
from xed-eects estimation and rather favor results from GMM estimation. But as far as all
the other models are concerned, we note again that non-rejection of the null of exogeneity of
the potentially endogenous regressors does not imply that we should place more emphasis on
xed-eects estimates, but simply that we do not know for sure that they are wrong, and hence
it is important to consider them together with the GMM estimates.
4.4.4

Hausman Tests for Fixed- versus Random-Eects

Finally, we utilize the usual Hausman test for the hypothesis that random-eects estimation is
consistent. This test assumes that xed-eects estimation is consistent (an assumption that is
accepted by the Wu-Hausman tests presented above for all models except the one where the
dependent variable is Altmans z-score) and checks whether the coe cients estimated by xed
and random eects are signicantly dierent.The dierence between random-eects and xedeects estimation is that the former makes use of the additional orthogonalities that E [wit ai ] = 0
and E [zit ai ] = 0, and as a result is more e cient, but inconsistent if z is endogenous with respect
to the xed eect. Since w is assumed to be exogenous, a rejection by the Hausman test is a
rejection of the null hypothesis that z is exogenous.
The results from the Hausman tests are presented in the diagnostics reported at the bottom
of each xed-eects estimation in Tables 5 through 16. All of them reject the null very strongly,
which is equivalent to rejecting the hypothesis that board characteristics are exogenous with
respect to the xed eect. As a result, performing random-eects yields inconsistent estimates,
and therefore we must use xed-eects estimation, as we do.

5
5.1

Results
Expected Results

The main focus of our study is the eect of board characteristics, especially board experience, on
the markets assessment of the rms value. Before presenting the actual results, it is instructive
to consider what results we expect. As we have already alluded to, the results we expect are not

22

determined by our beliefs regarding how boards work and how they should aect rm (marginal)
value, but rather by our beliefs regarding the optimality of rms choices and the accuracy of
the markets valuation of these choices. If we believe that rms choose their boards optimally
and markets value these choices correctly, then we should expect that board characteristics have
no marginal eect, neither on the rms true value nor on the markets assessment thereof. If
on the other hand we believe either that rms choose their boards sub-optimally, or that the
market consistently fails to appreciate the true value of these choices, then we should expect
that board characteristics have a marginal eect on the markets assessments.
We expect to nd that board experience has a positive marginal eect in our models. On
the one hand, such analyses have so far been infeasible due to the lack of data, and therefore
we expect to nd that neither do rms make optimal decisions regarding this dimension of
board choice, nor does the market know how to correctly value its contribution. On the other
hand, precisely the fact that neither academics nor professionals have endeavored to study
board experience might indicate that its value has so far been underestimated. This intuition
should be particularly true regarding the experience of independent directors, because it is often
believed that the most valuable characteristic of this class of directors is their independence,
and therefore little thought is given to whether they are experienced or not. Indeed, we nd
that board experience has the expected eect in most of our models: It has a positive eect on
alpha, a negative eect on HM L loading, a negative eect on Altmans z-score capturing the
probability of bankruptcy in the immediate future, a positive eect on income restatements, a
negative eect on accruals, and a positive eect on earnings surprises. This pattern of results is
only broken by our nding that experience has no signicant eect on ROA and some evidence
that it has a positive eect on the SM B loading.
In sharp contrast to the above, regarding board characteristics that have already been studied
in the literature, such as board independence and board size, we expect to nd small marginal
eects. The rationale is that academics and policy-makers have paid a lot of attention to their
potential value, and as a result we expect that rms choose them optimally and the market
values them accurately. If anything, it might be reasonable to expect that the degree of board
independence might have a negative marginal eect on market performance, for two reasons.
First, the attention that has been paid to board independence by the academic community,

23

but also by policy-makers has been overwhelming. In fact, legal requirements such as having
majority-independent boards and having only independent directors on the nomination and
compensation committees of rms might actually constrain rms choices, and force them
to have excessively high proportions of independent directors. Second, there appears to be a
tradeo between board independence and board experience: Directors who have no business
relation with the rm, and therefore can be classied as independent (granted that they satisfy
some additional requirements) are more likely to currently be employed in an industry that
is unrelated to the rms business, and therefore according to be inexperienced according to
our denition of experience. Since until now there has been no evidence demonstrating the
potential value of board experience, we might reasonably expect that rms do not have enough
information to choose independence optimally, and in fact, we would expect that they choose
excessively high proportions of independent directors. We will see below that this intuition is
only weakly veried by the data: board independence has a negative
Without going into much detail, we mention here that our expectations are somewhat, but
not entirely, veried by the data. First, we stated that we would expect board size to have no
marginal eect on rm performance, and indeed we nd coe cients that are not statistically
dierent from zero in most of our models. However, we nd some evidence that board size has a
negative eect on ROA (for regular OLS and xed-eects, not for IV estimation). Interestingly,
the marginal eects of board size on the dependent variables that interest us the most, i.e., on
alpha and on the HM L loading, are inconclusive, since for some specications and estimation
methods they are positive and for others negative. Second, we stated that we would expect board
independence to have no marginal eect or maybe even a negative eect on rm performance.
We nd coe cients that are not statistically dierent from zero in most of our models, and some
weak evidence (for regular OLS and xed-eects, not for IV estimation) that board independence
has a negative eect on the probability of having earnings surprise larger than the 10th as well
as the 25th percentile of the distribution of surprises greater than 0. We also nd strong
evidence that independence has a positive, i.e., adverse, eect on Altmans z-score capturing
the probability of the rm going bankrupt in the following sixteen months. However, perhaps
surprisingly, we also nd that independence has a positive eect on income restatements, both of
which indicate that increasing the board independence might still have some positive marginal

24

monitoring value.

5.2

Market Performance

It would seem natural to start our investigation of the marginal eect of board characteristics on
market performance by examining their eects on raw returns. Even though we have performed
this analysis and found statistically insignicant positive eects for experience and negative
eects for board size and independence we do not report them here, because they are hard
to interpret: An increase in returns could be caused by an increase in the return required by
investors, or by an increase in the rms performance.
As a result, our approach is to rst decompose raw returns using a multi-factor asset pricing
model based on the excess return of the market and on the Fama and French (1992) and Carhart
(1997) factors. The Fama-French factors are two zero-investment portfolios: High-Minus-Low
(HML), which is long on high and short on low book-to-market stocks, and Small-Minus-Big
(SMB), which is long on low and short on high market value stocks. The Carhart factor UpMinus-Down (UMD) is the zero-investment portfolio which is long on high and short on low
prior return stocks. Thus, we estimate the equation
rit =

1i M KT

2i HM L

3i SM B

4i U M D

it ,

(3)

where rit is a rms excess raw return, M KT , HM L, SM B and U M D are the factorsexcess
returns, and

it

is the disturbance, and then we analyze the marginal eect that board char-

acteristics, and particularly experience, have on our estimates for

i,

1i ,

2i ,

3i ,

and

4i .

Interpretations of these coe cients are provided below, together with the results.
Before presenting our results, we note that we estimate Equation (3) in two dierent ways:
one uses daily and the other uses monthly data for the current scal year. We believe that
using monthly of data is the preferable approach for the following reasons. First, estimation
using daily data is prone to being inuenced by outliers and by the bid-ask bounce. Second,
even though estimation using twelve months of data might be expected to yield less accurate
estimates of the factor loadings, by comparing the condence intervals of the estimates across
the two methods, we nd that our preferred estimation method actually yields the most accurate
estimates. Having said all this, even though in the text we will mostly be discussing results from
25

models that use factor loading estimates from monthly data, Tables 5, 8, 10, 11, and 12 present
the results from both approaches, as a robustness check. Indeed, it is reassuring that, with few
exceptions, our results are robust.

5.3

Eect on alpha

is the abnormal stock return of rm i, i.e., the rms raw stock return during the scal

year minus the return predicted by the factor pricing model in Equation (3). Investors consider
abnormal stock return to represent how good a rm is at beating market expectations. It is
in fact often used in the mutual funds literature to measure the over-performance of mutual
fund managers. It is also used in the literature, e.g., by Brick, Palia, and Wang (2006), as the
appropriate measure of market performance, since it is free of the conicting interpretations
that the raw return is subject to, at least as long as one is willing to assume that the four-factor
model adequately captures the systematic risk in the stock market.
In Table 5 we can see that board experience of independents has a signicantly positive
eect on abnormal return: All the xed-eects estimates are signicant, while the IV estimates
based on monthly estimation of the asset-pricing model are signicant and the ones based on
daily estimation have t statistics between 0:97 and 1:23 and point estimates even higher than
the corresponding ones from xed-eects. This indicates that non-signicance is probably not
due to a disappearance of the eect, but rather due to higher variance of the IV estimator.
The xed-eects (IV) point estimate is that a 1 standard deviation increase in the industry
experience of independent directors results in a 0:054 (0:136) standard deviation increase in the
monthly abnormal return. This means that for the average rm, substituting an inexperienced
independent director with an experienced independent director is associated with an increase
of 2:2% (5:3%) in annual abnormal return (and hence rm value). For the median rm in
our sample this implies a 36 million dollar increase in rm value. It is important to note that
these eects are reduced in half when we trim the lowest and highest 5% of the distribution of
abnormal returns, though the signicance of the results is not aected.
This economically signicant gain indicates that the value of industry experience for independents is grossly underestimated by the market, and most likely by rms as well.8 It is
8

Remember, as we mentioned in Section 4.1 it is possible that the rms are aware of the positive marginal
value that experience independent directors add, but they cannot take advantage of this because neither can they

26

underestimated by the market, because if it were not, rms with independent directors with more
industry experience should not experience higher abnormal returns over the course of a year, but
rather the added value should be immediately capitalized. It is likely underestimated by rms,
because if it is possible for rms to increase their abnormal returns by these amounts annually,
by selecting independent directors with more industry experience, it is probably because they
do not they do not know it. As mentioned in Section 4.1, a caveat to this interpretation is
that rms might be aware of the positive marginal value that experienced independent directors
add, but they cannot take advantage of this because neither can they control the CEO and the
board, nor can they change them. Though this scenario is plausible, we would tend to favor
the interpretation that rms simply do not know, because, to the best of our knowledge, the
experience of independent directors is never mentioned by shareholders and/or the media as an
issue of discontent.
In contrast to the above result, the eect of the industry experience of a liated directors
on alpha is insignicant. The eect of board independence is also insignicant, a result that is
in line with that of Brick, Palia, and Wang (2006). Finally, we get mixed results regarding the
eect of board size on alpha: xed-eects and IV estimates based on monthly estimation of the
asset-pricing model are signicantly positive and insignicant, respectively. A negative eect of
board size would initially appear to be more consistent with the existing literature (see, e.g.,
Yermack (1996)) that shows a negative marginal eect for board size, but note that these past
studies examine such measures of performance as Tobins Q and ROA, rather than abnormal
returns as we do.
To summarize the preceding discussion, we have found strong evidence that the experience
of independent directors has a positive eect on abnormal returns, and little-to-no evidence that
the other board characteristics have any eect. To interpret the result for the experience of
independent directors, we examine whether this increase in abnormal returns is due to surprise
returns or compensation for risk not captured by the pricing factors.
control the CEO nor can they change him.

27

5.3.1

Eect on Earnings Surprise

In support of the interpretation that the increase in abnormal return caused by an increase
in board experience is due to an element of surprise, rather than additional risk, we present
estimates of the marginal eect of board experience on earnings surprises. The dependent variable
in Table 6 is standardized earnings surprise dened as the average over four quarters of
S=

ea

ef
P0

where ea and ef are the actual and forecasted (by analysts) earnings per share, P0 is the rms
stock price at the beginning of the scal quarter, and

is the average inverse price-to-earnings

ratio for the primary industry in which the rm operates. We choose this standardization
because in a sense it standardizes the dierence between the actual and estimated earnings with
the expected earnings for a rm with the given price and operating in the given industry.
We do not simply standardize by the actual or estimated earnings, because they can both be
negative and hence produce strange results. We also prefer this standardization to the one that
is sometimes used in the literature, which is to divide the earnings surprise by the standard
deviation of the analystsearnings estimates. The reasons for this are that, rst, this standard
deviation does not always exist, and second it is closely associated to the number of analysts
following the company, hence not really an accurate measure of the actual surprise. Having said
this, we have estimated the models in Table 6 using this alternative denition of standardized
earnings surprises and our results are qualitatively the same.
What we see from Table 6 is that the experience of independent directors has a signicant
positive marginal eect on earnings surprises. According to point estimates, a one-standarddeviation increase in the industry experience of independent directors results in a 0:048 (0:132
for IV) standard deviation increase in standardized earnings surprise. To gain some intuition
regarding the economic magnitude of this eect, we perform the following back-of-the-envelope
calculation. Assume that the rms inverse price-to-earnings ratio remains the same and it is
equal to the rms primary industrys inverse price-to-earnings ratio, i.e., that
eH
ef
ea
eH
f
=
= H = aH = ,
Pf
Pa
Pa
Pf
28

(4)

where the superscript H refers to quantities given the substitution of an inexperienced independent director with an experienced one, and Pf and Pa are the rms stock prices if the forecasted
and actual earnings are realized, respectively. Then, substituting an inexperienced independent
director with an experienced one corresponds to a surprise increase in market value of
M KTaH

M KTfH

(M KTa

M KTf ) =
=
=

where M KT is market value of equity and

PaH

PfH

eH
a

eH
f

(Pa
ea

P0

ef
P0

Pf )
!

M KT0
P0

M KT0

S M KT0 ,

S is the corresponding increase in annual standard-

ized earnings surprise, which equals 0:021 for the xed-eects estimate. For the median rm in
our sample this implies a 35 million-dollar surprise increase in market value. This increase in
value is very close in value to the 36 million dollar increase implied by our results on the eect
of experience on abnormal returns, presented in the previous section.
Regarding the other board characteristics, we quickly note that their marginal eects on
standardized earnings surprise are insignicant.
We interpret the nding that the experience of independent directors has a positive marginal
eect on earnings surprises, as evidence that rms that increase their independent board membersexperience, surprise the market with their unexpectedly good performance, and therefore
earn a higher abnormal return, i.e., have a higher alpha. Indeed, separating the standardized
earnings surprise into its two components, standardized actual and forecasted earnings, and
estimating two separate models, we nd that our aforementioned result regarding standardized
earnings surprise is driven by a positive marginal eect on standardized actual earnings.
An alternative explanation for the positive marginal eect of the experience of independent
directors on earnings surprises is that increasing the proportion of experienced independent
directors makes the rm more likely to manipulate prots in order to consistently beat analysts
expectations and appear to be doing better than it actually is. Even though this explanation
sounds counter-intuitive, we examine empirically whether it is true or not, and as expected, we
nd two pieces of evidence against it.
First, research by Richardson, Teoh, and Wysocki (1999) on the under-performance of sea29

soned equity oerings and by DeGeorge, Patel, and Zeckhauser (2007) on market response to
earnings announcements, documents that there is an unusually large number of cases in which
rms report earnings that just beat analysts expectations. In addition, DeGeorge, Patel, and
Zeckhauser (2007) present evidence that just beating, compared to just meeting, analyst forecasts yields an incremental excess return of 1:04%. Given this strong incentive that managers
have to just beat analyst forecasts, it seems that excess accumulation of earnings announcements
right above the threshold of just meeting analyst forecasts might indicate earnings management.
As a result, what we want to show is that the positive marginal eect that experienced independent directors have on earnings surprises is attributed to an increased likelihood of earnings
announcements that beat analyst expectations by a signicant margin. For this purpose, we
consider the distribution of positive standardized earnings surprises (the positive distribution)
and we create a dummy variables that takes value 1 when the standardized earnings surprise is
above the 25th percentile of the positive distribution and 0 otherwise.9 Table 7 presents results
from linear probability models (logit results are qualitatively identical) with and without rm
xed eects, and demonstrates that the experience of independent directors has a signicantly
positive marginal eect on the probability of actual earnings beating analyst forecasts by a
signicant margin. In particular, substituting an inexperienced independent director with an
experienced one is associated with a 2 (5:7 for IV) percentage point increase in probability.
Second, the literature, e.g., Richardson, Teoh, and Wysocki (1999), as well as the US Securities and Exchange Commission (SEC) have used negative restatements to identify rms that
have engaged in earnings manipulation. In addition, Dechow and Skinner (2000) and Bradshaw,
Richardson, and Sloan (2001) present evidence that positive accounting accruals are an important determinant of earnings manipulation. If it were true that an increase in the experience
of independent directors leads to an increase in earnings management and hence to an increase
in earnings surprise, then we would expect to nd that it also leads to an increase in negative
restatements and/or accruals. As we discuss in more detail in Section 5.6, we actually nd that
experience reduces both negative restatements and accruals.
9

This procedure has been repeated with the cuto point being the 10th percentile and the results are identical.

30

5.4

Eect on HML loading

Next, we turn our attention to the marginal eect of board characteristics on the rms loading
on the HML factor, i.e.,

2i

in the asset pricing model described by Equation (3). We can see in

Table 8 that for most specications the experience of independent directors has a signicantly
negative eect on the covariance of the rms return with the return to the HML portfolio.10
In particular, according to the point estimate based on monthly estimation of the asset-pricing
model, a one-standard-deviation increase in experience results in a 0:057 (0:12 for IV) standarddeviation decrease in the HML loading.
To interpret this result, we rst need to try to understand what the HML factor represents.
Unfortunately, there is no consensus in the literature. On the one hand, Fama and French
(1996) propose that the HML factor is a proxy for the risk of default, i.e., its return is a reward
for the higher risk of distress associated with the rms that the factor buys. Intuitively, these
could be rms whose market value has decreased since the time they entered the stock market,
and hence they might be more likely to go bankrupt. In an examination of default risk in
equity returns, Vassalou and Xing (2004) conclude that the book-to-market eect captured by
the HML factor can indeed be viewed as a default eect. In particular, they nd that within
the highest and second-highest default risk quintiles, high book-to-market stocks earn 30% and
12:7%, respectively, more than low book-to-market stocks. They do note however, that the
HML factor appears to contain information unrelated to nancial distress, since when they add
in a variant of Equation (3) a measure of the change in the aggregated default likelihood for the
whole market, they nd that the loading of the test assets on the HML factor is still signicant.
An alternative interpretation, proposed by Lakonishok, Shleifer, and Vishny (1994) and Daniel
and Titman (1997), is that the excess returns to the HML factor are simply due to psychological
factors that cause investors to undervalue high book-to-market stocks. Our subsequent analysis,
shown in Table 9, seems to indicate that the negative marginal eect of independent directors
experience on HML loading arises from its negative marginal eect on the rms risk of nancial
distress.
Table 9 presents the results from the estimation of Altmans (1968) z-score, as updated by
10

The only specication that contradicts this result is the xed-eects estimation based on daily returns data,
where we nd a coe cient very close to 0, possibly indicating that endogeneity is a serious issue in the xed-eects
model.

31

Stephen A. Hillegeist and Lundstedt (2004). To construct the updated Altmans z-score, one
estimates a logit regression of the probability of bankruptcy in the 4 to 16 months following the
end of the scal year on several accounting measures, and then calculates the implied predicted
probability of bankruptcy, i.e., the z-score. In particular, the formula used is
4:34

0:08

WC
RE
+ 0:04
TA
TA

0:10

EBIT
TA

0:22

VE
S
+ 0:06
,
TL
TA

where W C is working capital, T A is book value of assets, RE is retained earnings, EBIT is

earnings before interest and taxes, V E is market value of equity, T L is total liabilities; and S is
net sales.
We see in Table 9 that an increase in the experience of independent directors is associated
with a statistically signicant (for IV, though xed-eects estimate is also close to signicance)
decrease in Altmans z-score, i.e., a lower predicted probability of bankruptcy in the next year.
In particular, a one-standard-deviation increase in experience yields an estimated 0:02 (0:17 for
IV) standard-deviation decrease in Altmans z-score. It is interesting to also note that comparing
the results from Tables 8 and 9 e.g., specication (4) on both tables, though looking at other
columns works equally well we see that out of the 14 estimated coe cients, 11 have the
same sign in both models, 9 of which are also signicant in both models. This pattern by no
means proves, but at least indicates that there is a close relationship between HML loading and
Altmans z-score, the common thread likely being that they both proxy for the risk of nancial
distress. As a result, we have some evidence that we can interpret the negative marginal eect
that independent directorsexperience has on the covariance with the HML factor, as a reduction
in the rms risk of distress.
Before continuing to the next section, we note here the marginal eects of the other board
characteristics on HML loading and Altmans z-score. While the experience of a liated directors
and the proportion of independent directors have no statistically signicant eect, we see in
Tables 8 and 9 that board size has a signicant negative marginal eect on both the HML
loading and on Altmans z-score.11
11
As with the eect on the HML loading above, the only specication where this result is not true is the xedeects estimation based on daily returns data, where we nd a coe cient with a non-signicant positive sign,
again indicating that endogeneity is likely a serious issue in the xed-eects model.

32

5.5

Eect on beta, SMB loading and UMD loading

We now turn our attention to our results on models that estimate the marginal eects of board
characteristics on the covariance of the rms return with that of the market, and the SMB
and UMD factors. As can be seen from Tables 10, 11, and 12, we mostly nd that board
characteristics have no signicant marginal eect on these loadings. We do note, however, that
we have some weak evidence since the eects only show up in the IV specication based on
daily returns data that board size has a positive marginal eect on the market and SMB
loadings, and that the experience of independent directors has a positive marginal eect on
SMB loading.
The evidence that the experience of independent directors might have a positive marginal
eect on SMB loading is interesting, especially given the evidence presented in Section 5.4 and
Table 8 that it has a signicant negative marginal eect on the HML loading. The reason is
that as Vassalou and Xing (2004) show, both the HML and the SMB factors capture to some
extent default eects. However, our two results are not necessarily inconsistent. The reason is
that these factors either do not only capture default eects or at least do not capture identical
dimensions of default eects, since as Vassalou and Xing (2004) demonstrate, including another
proxy for default risk in Equation (3) does not eliminate the signicance of the HML and SMB
loadings of test assets. In fact, Arshanapalli, Fabozzi, and Nelson (2006) examine the returns of
the market, SMB, and HML factors under dierent macro-economic scenarios (e.g., up- versus
down-market, expansionary versus restrictive scal policy, and high versus low credit spread)
, and they show that in all scenarios examined the market and SMB returns behave in a very
similar manner, while HML returns behave in a distinctly dierent manner. It is of particular
interest to note that the SMB factor earns a higher return in periods when the credit spread is
higher, while the opposite is true for the HML factor, evidence that the SMB factor acts as a
hedge rather than a proxy for the risk of nancial distress.
The evidence by Arshanapalli, Fabozzi, and Nelson (2006) indicates that the market and
SMB factors might proxy for similar risks, dierent from the risks that HML proxies for. Indeed
the correlation between the SMB and HML loadings is much higher at 0:44 than any other
pairwise factor correlation. This motivates us to re-estimate the models in Table 11, this time
including the beta and HML loading as additional regressors. We nd that the coe cient on

33

beta is signicant while that on HML, and also that the coe cient on the independent directors
experience as well as that on board size reduce to insignicance. These results indicate that the
positive eect of independent directorsexperience on the SMB loading probably does not work
through a positive eect on the risk of default, but rather through a component captured by the
market as well as the SMB factors.
Still, the channel through which board experience might (since the result is only signicant
in one of the specications) positively aect the SMB loading remains unidentied. We propose
a couple of alternative explanations. On the one hand, it could be the case that increasing the
proportion of directors with industry experience results in the rm becoming more focused on
its core businesses, and less likely to explore new markets and diversify. This reduction in diversication might expose the rm more to systematic risks captured by the SMB factor. Indeed
we can see from Table 11 that the number of business segments of a rm has a signicantly
negative marginal eect on the rms SMB loading. On other hand, it could be that increasing
independent directorsexperience increases the covariance with the SMB factor without increasing its true covariance with the underlying systematic risks. As can be seen from Tables 13,
14, and 15, there is signicant evidence that an increase in independent directors experience
results in fewer accruals, fewer negative income restatements, and a smaller probability of very
negative income restatements, i.e., less earnings management. The reason for this could be that
experienced independent directors perform their monitoring function more eectively than inexperienced ones, at least in the margin. As a result, a higher covariance with the SMB factor
returns could be attributed to a lower willingness to manipulate the markets perceptions of the
rms performance, which leads to reduced dampening of the eects of market-wide risks.

5.6

Eect on Earnings Manipulation

As mentioned towards the end of Section 5.3.1, the literature has shown that positive accruals
and negative restatements are associated with rms that have engaged in earnings manipulation.
To measure accruals we use two denitions, one from Hribar and Collins (2002) and one
from Jr. (2003), as a robustness check, because admittedly there is a wide range of possible
denitions. Hribar and Collins (2002) compute accruals as EBXI

CF Ocf , where EBXI

is Earnings Before Extraordinary Items and discontinued operations and CF Ocf is Operating

34

Cash Flows from continuing operations. Jr. (2003) rst calculates accruals as IBXO

CASH,

where IBXO is Income Before Extraordinary Items and CASH is cash from operations, and
then calculates abnormal accruals as the residual from an industry-wide regression of accruals
on

Sales

Accrec and on P P E, where Accrec is Accounts Receivable and P P E is Property

Plant and Equipment. He argues that these abnormal accruals rather than accruals themselves
should proxy for earnings management. Our results based on the Hribar and Collins (2002)
measure of accruals and the Jr. (2003) measure of abnormal accruals are qualitatively the same,
so we only present the latter in Table 13. In the table we can clearly see that the experience of
independent directors has a signicantly negative eect on accruals. The eect ranges from an
insignicant (with t stat 1:46) xed-eects estimate of a 0:038 standard-deviation decrease in
accruals to a signicant IV estimate of a 0:23 standard-deviation decrease. Interestingly, there
is also some evidence that board size has a negative eect on accruals. This evidence tells us
that independent directors experience, and possibly board size too, have positive monitoring
marginal value.
This result is corroborated from the evidence in Tables 14 and 15, where we present evidence
regarding the marginal eects of board characteristics on income restatements. In Table 14 the
dependent variable is income restatements. We nd that experience of independent directors,
board size, and proportion of independent directors all have a signicantly positive eect (in
the IV specication only). For example substituting an inexperienced independent director with
an experienced one is associated with a 0:66 (2:16 for IV) million-dollar increase in income
restatements. We could interpret this result as indicating that all these board characteristics
have positive monitoring marginal value.
To further investigate the eect of board characteristics on restatements, we show in Table
15 their marginal eects on a dummy equal to 1 if income restatement is below the 5th percentile
of the distribution (i.e.,

13 million dollars) and 0 otherwise. We nd that only the experience

of independent directors has a signicantly negative coe cient: the preferred IV point estimate
from a linear probability model is

0:133, i.e., substituting an inexperienced independent direc-

tor with an experienced one is associated with 9:9 percentage points reduction in the probability
of a large negative income restatement.

35

5.7

Eect on Accounting Performance

In Table 16 we examine the eect of board characteristics on a measure of accounting prots,

return on assets, as dened by Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) in the current year, divided by the book value of assets in the previous year. We see
that the experience of independent board members has a positive coe cient somewhat close to
signicance on ROA in the IV model, while the coe cients for the other board characteristics
are further from signicance. Even though accounting measures of performance are not our
focus, it is comforting that we nd that the eect of board experience has the correct sign, even
if it is not signicant.

5.8

Quantile Regressions

All the results in Tables 5 through 16 utilize the least squares methodology that assumes a linear
expectation of the dependent variable conditional on the independent variables. In this section
we replicate the above results, focusing solely on the eects of the experience of independent
directors, under a dierent set of assumptions: We perform quantile regressions that assume that
each quantile of the conditional distribution of the response variable is a (potentially dierent)
linear functions of the observed covariates.12 The reason we estimate these models is that
we would like to gain a deeper understanding of the eect that board experience has on our
dependent variables. In particular, a least squares estimate tells us how experience aects the
mean of the dependent variables distribution, but we would like to know how it aects the whole
distribution. This would inform us as to whether all or just a few rms can reap the estimated
marginal benet of a more experienced board.
Introduced by Roger Koenker (1978), a linear quantile regression for the q th quantile of the
distribution of the response variable yit conditional on covariates (wit ; zit ) solves yields estimates
^ that solve
minp
2R

where
12

yi

x0i

( ) is the tilted absolute value function that yields the

th sample quantile as the

Note that this linearity assumption is restrictive, but fairly standard in the literature.

36

solution of
minp
2R

(yi

).

In Figure 1 we plot, for most dependent variables in our analysis, quantile regression estimates
with their condence intervals for the eect of the experience of independent directors, together
with the corresponding least squares estimates and condence intervals. The point estimates
represent the impact in units of standard deviation of a one-standard-devation change in
board experience on each of the dependent variables, holding other dependent variables xed.
It is quite reassuring to see in Figure 1 that the experience of independent directors mostly
has a uniform eect over the whole range of the distribution for most dependent variables in our
analysis. That is it appears that the experience of independent directors exerts a pure location
shift on the conditional distributions of alpha, the HML, SMB, and UMD loadings, as well as
for Altmans z-score. So our least squares results presented in Tables 5 through 16 do a good
job of capturing the eect of board experience on the dependent variables, for all points of the
dependent variables distribution. The exceptions to this result are the eect of board experience
on beta and on earnings surprise. Regarding beta, the least squares estimate is non-signicant,
and we can see in Figure 1 that the reason is not necessarily that board experience has no eect
on beta, but rather that it has a signicantly negative eect at the lower end of the distribution
of beta, and an insignicantly positive eect at the upper end of the distribution.
Regarding earnings surprise, we see in Figure 1 that the eect of board experience is a
lot more pronounced for the upper end of the distribution. This means that increasing the
proportion of experience independents has a very big impact on the probability of experiencing
very high earnings surprise. Indeed, this result is somewhat related to our least squares result
in Table 7, where we have shown that board experience increases the probability of experiencing
earnings surprise signicantly above 0. Together, these results further strengthen our belief
that the experience of independent directors increase earnings surprise because the rm really
performs above the markets expectations, and not not because they manipulate earnings. As
we mentioned earlier, if the latter were true, the quantile regression should show that experience
has a disproportionately large positive eect on earnings surprise around 0, not at the upper
end of the distribution.

37

Conclusion

In this study we have presented evidence that board experience, in particular the experience of
independent directors, has a positive marginal value. It increases a rms abnormal returns and
earnings surprises, it reduces its loading on the HML factor and the forecasted probability of
bankruptcy, and it reduces accruals and earnings restatements. This evidence indicates that on
the one hand the market does not correctly assess the value of experience on the board, and on
the other hand rms do not choose board experience optimally, at least as long as they are not
constrained in their choices by the prevailing corporate governance structure. The implications
of these results are far-reaching, as they could inform the actions of the market, rms, as well
as policy-makers.
Another contribution of this study is the compilation of a large panel dataset containing
employment information for individual directors. This data can be used to perform a number
of studies that are outside the scope of the current study. First, it is interesting to examine for
what kinds of rms and under which circumstances director experience is most valuable. Second,
directors are likely to be most valuable in special events rather than in day-to-day operations,
so an interesting area of study are event studies of mergers and acquisitions, seasoned oerings,
etc. Third, while we have focused on a specic measure of experience, industry experience of
independent directors, the eects of other types of experience can also be studied: experience in
top versus non-top executive positions, experience in specic events, e.g., M&As, etc. Finally,
our database would allow a large-scale examination of network eects in boards of directors.

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41

Table 1: Summary Statistics of Dependent Variables

In this table we present Summary Statistics for the dependent variables in our models. The denitions of these
variables are as follows: 1) The Abnormal Return, beta, and HML, SMB, and UMD loadings are estimated from
the Fama-French-Carhart model. Daily estimates are calculated using 250 daily returns, while monthly estimates
are calculated using 12 monthly returns. 2) Earnings Surprise is dened by S =

ea

ef
P0

, where ea and ef are the

actual and forecasted (by analysts) earnings per share, P0 is the rms stock price at the beginning of the scal
year, and

is the average inverse price-to-earnings ratio for the primary industry in which the rm operates. 3)

The probability of very positive earnings surprise is a dummy equal to 1 if Earnings Surprise is above the 25th
percentile of the positive part of its distribution. 4) Altmans (1960) z-score as updated by Hillegeist et al (2004)
is dened as

4:34

0:08

WC
TA

+ 0:04

RE
TA

0:10

EBIT
TA

0:22

VE
TL

+ 0:06

S
,
TA

where W C is working capital, T A

is book value of assets, RE is retained earnings, EBIT is earnings before interest and taxes, V E is market value
of equity, T L is total liabilities; and S is net sales. 5) Accruals is as dened by Collins and Hribar (2002), i.e.,
T ACCcf = EBXI

CF Ocf , where EBXI is Earnings Before Extraordinary Items and Discontinued Operations

(Compustat Item 123) and CF Ocf is Operating Cash Flows from Continuing Operations (Compustat Item 308
minus data Item 124). 6) Income Restatement is Compustat Data Item 123. 7) The probability of very negative
Income Restatement is a dummy that equals 1 if Income Restatement is below the 5th percentile of its distribution,
which corresponds to a downwards restatement beyond 13 million dollars. 8) Return on Assets (ROA) is dened
as Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) in the current year, divided by the
book value of assets in the previous year.

Abnormal Return (daily)

Mean

Med

Std

Min

Max

6420

0.000

0.000

0.001

-0.004

0.005

Abnormal Return (monthly)

6419

0.004

0.003

0.041

-0.126

0.148

Beta (daily)

6420

1.088

1.061

0.434

0.052

2.445

Beta (monthly)

6419

1.078

1.009

1.547

-3.943

6.690

HML loading (daily)

6420

0.257

0.310

0.843

-2.969

2.297

HML loading (monthly)

6419

0.250

0.291

2.285

-7.719

8.081

SMB loading (daily)

6420

0.524

0.482

0.644

-0.818

2.597

SMB loading (monthly)

6419

0.450

0.359

1.552

-4.196

6.327

UMD loading (daily)

6420

-0.114

-0.095

0.544

-1.981

1.478

UMD loading (monthly)

6419

-0.163

-0.119

1.572

-5.952

5.138

Earnings Surprise

5755

-0.026

-0.001

0.123

-0.876

0.327

Prob. Very Pos. Earnings Surprise

5755

0.349

0.000

0.477

0.000

1.000

Altmans Z-score

6249

0.008

0.008

0.004

0.000

0.014

Accruals

6278

-0.066

-0.054

0.122

-3.025

0.792

Income Restatement

6420

-2.902

0.000

20.961

-139.400

74.643

Probability Very Neg. Restatement

6420

0.053

0.000

0.225

0.000

1.000

Return on Assets

6420

0.179

0.169

0.100

-0.132

0.474

42

Table 2: Summary Statistics of Independent Variables

In this table we present Summary Statistics for the independent variables in our models. The denitions of
these variables are as follows: (1) Industry Experience of A liated and Independent directors, a ratio in [0; 1]
indicating the proportion with past experience relevant to the rms business; (2) Age of A liated and Independent
directors, which proxies for general experience; (3) Board Size, i.e., number of directors; (4) Board Independence,
the proportion of directors with no relationship with the rm; (5) Leverage, i..e, Debt over Assets; (6) Firm
Size, i.e., Log Market Capitalization; (7) Capital Expenditures Over Sales; (8) Collateralizable Assets, measured
as (Inventory plus Net PPE) Over Assets; (9) Risk, measured as the St.Dev. of daily returns; (10) Past ROA,
measured as 3-year average of EBITDA Over Assets; (11) Free Cash Flows Over Assets; (12) Number of Business
Segments.
N

Mean

Med

Std

Min

Max

Experience of Independents

6420

0.125

0.000

0.191

0.000

1.000

Experience of A liated

6420

0.721

0.667

0.269

0.000

1.000

Board Size

6420

9.600

9.000

2.397

5.000

19.000

Board Independence

6420

0.670

0.700

0.167

0.077

0.938

Age of A liated

6420

57.740

58.000

5.308

41.000

70.500

Age of Independents

6420

60.413

60.500

4.124

47.000

72.250

Leverage

6420

0.256

0.243

0.190

0.000

1.129

Firm Size

6420

7.450

7.306

1.554

4.129

11.370

CapEx Over Sales

6420

0.075

0.044

0.117

0.000

0.970

Collateral

6420

0.461

0.458

0.220

0.014

0.913

Returns Variability

6420

0.026

0.023

0.011

0.009

0.077

Past ROA

6420

0.166

0.160

0.079

-0.266

0.404

FCF Over Assets

6420

0.095

0.094

0.088

-0.355

0.356

Num Segments

6420

2.640

2.000

1.745

1.000

7.000

43

Table 3: Wu-Hausman Test for Endogeneity of Board Characteristics - I

In this table we present Wu-Hausman tests for the null hypothesis that board characteristics are exogenous. In
each panel, specications (1), (2), (3), (4), and (5) test, respectively, for endogeneity in models of , HML loading,
, SMB loading, and UMD loading. We test separately two hypotheses. In Panel A we test the null that all board
characteristics are exogenous with respect to the observation-specic error, i.e., that E [zit

is ]

= 0 8s; t. In Panel

B we test the null hypothesis that, assuming that board characteristics other than experience are exogenous with
respect to observation-specic error, the same is true for experience, i.e., that E [z1it

is ]

= 0 8s; t. These results can

inform us regarding the relative merits of xed-eects and GMM estimation procedures. More precisely, the test
is performed as follows. In the rst stage we regress all variables that are endogenous under the alternative on all
the exogenous variables, including the instruments for the potentially endogenous variables. In GMM estimations
P
the instruments for zit take the form xit = zit k t 1 k ts=1k zis , with k = 1, 2. In the second stage we include the

residuals from the rst-stage regressions in the xed-eects model. We only report the second-stage coe cients of
the rst-stage residuals of the potentially endogenous regressors, together with diagnostics. Robust t-statistics are
reported in parentheses. */**/*** indicate signicance at the 10%/5%/1% level, respectively.
Panel A
(1)
(2)
Experience of Independents
Experience of A liated
Board Size
Board Independence
Age of A liated
Age of Independent

N
R2
Wu-Hausman F-stat
Wu-Hausman p-val

0.014
(0.11)
-0.194
(-1.07)
0.779*
(1.76)
0.223
(0.82)
-0.001
(-0.01)
0.265*
(1.91)
4020
0.073
1.059
0.385

-0.107
(-0.90)
0.062
(0.36)
-0.462
(-1.11)
0.042
(0.16)
-0.005
(-0.05)
-0.119
(-0.91)
4020
0.037
0.636
0.702

Panel B
(1)
(2)
Experience of Independents
Experience of A liated

N
R2
Wu-Hausman F-stat
Wu-Hausman p-val

(3)

(4)

-0.052
(-0.43)
0.206
(1.19)
-0.822*
(-1.95)
-0.392
(-1.52)
-0.021
(-0.21)
-0.326**
(-2.47)

0.040
(0.33)
-0.116
(-0.68)
-0.091
(-0.22)
0.088
(0.35)
-0.130
(-1.31)
0.018
(0.14)

0.012
(0.11)
0.188
(1.21)
-0.440
(-1.17)
-0.361
(-1.57)
0.007
(0.08)
-0.160
(-1.35)

4020
0.028
0.592
0.737

4020
0.027
0.773
0.591

4020
0.024
1.181
0.313

(3)

(4)

(5)

(5)

-0.125
(-1.03)
-0.137
(-0.88)

-0.007
(-0.06)
0.146
(1.00)

0.073
(0.63)
0.008
(0.06)

0.082
(0.72)
-0.075
(-0.52)

0.061
(0.59)
-0.009
(-0.07)

4020
0.072
0.946
0.388

4020
0.037
0.500
0.606

4020
0.022
0.200
0.819

4020
0.027
0.383
0.682

4020
0.026
0.175
0.839

44

Table 4: Wu-Hausman Test for Endogeneity of Board Characteristics - II

In this table we present Wu-Hausman tests for the null hypothesis that board characteristics are exogenous. In
each panel, specications (1), (2), (3), (4), and (5) test, respectively, for endogeneity in models of Accruals, Income
Restatements, Altmans z-score, Standardized Earnings Surprise, and ROA. We test separately two hypotheses. In
Panel A we test the null that all board characteristics are exogenous with respect to the observation-specic error,
i.e., that E [zit

is ]

= 0 8s; t. In Panel B we test the null hypothesis that, assuming that board characteristics other

than experience are exogenous with respect to observation-specic error, the same is true for experience, i.e., that
E [z1it

is ]

= 0 8s; t. These results can inform us regarding the relative merits of xed-eects and GMM estimation

procedures. More precisely, the test is performed as follows. In the rst stage we regress all variables that are
endogenous under the alternative on all the exogenous variables, including the instruments for the potentially
P
endogenous variables. In GMM estimations the instruments for zit take the form xit = zit k t 1 k ts=1k zis , with

k = 1, 2. In the second stage we include the residuals from the rst-stage regressions in the xed-eects model.

We only report the second-stage coe cients of the rst-stage residuals of the potentially endogenous regressors,
together with diagnostics. Robust t-statistics are reported in parentheses. */**/*** indicate signicance at the
10%/5%/1% level, respectively.

(1)
Experience of Independents
Experience of A liated
Board Size
Board Independence
Age of A liated
Age of Independent

N
R2
Wu-Hausman F-stat
Wu-Hausman p-val

-0.059
(-0.49)
-0.205
(-1.18)
0.250
(0.59)
0.168
(0.65)
-0.080
(-0.79)
0.147
(1.11)

-0.094
(-0.77)
-0.148
(-0.84)
0.126
(0.30)
0.155
(0.60)
-0.122
(-1.19)
0.124
(0.93)

4020
0.176
0.735
0.622

4012
0.175
0.743
0.615

(1)
Experience of Independents
Experience of A liated

N
R2
Wu-Hausman F-stat
Wu-Hausman p-val

Panel A
(2)

Panel B
(2)

0.088
(0.99)
-0.055
(-0.75)

0.011
(0.10)
-0.145
(-1.57)

4497
0.088
0.835
0.434

4670
0.028
1.264
0.283

45

(3)
0.014
(0.11)
-0.194
(-1.07)
0.779*
(1.76)
0.223
(0.82)
-0.001
(-0.01)
0.265*
(1.91)
4020
0.073
1.059
0.385

(3)
0.113***
(2.76)
0.042
(1.22)
4552
0.220
4.303
0.014

(4)
-0.015
(-0.15)
-0.126
(-0.89)
-0.234
(-0.67)
0.083
(0.39)
0.070
(0.83)
-0.001
(-0.01)
3521
0.210
0.591
0.738

(5)
-0.134
(-1.24)
0.082
(0.53)
-1.049***
(-2.77)
-0.356
(-1.54)
-0.075
(-0.82)
-0.223*
(-1.88)
4020
0.106
1.382
0.218

(4)

(5)

-0.200**
(-1.97)
-0.091
(-1.09)

0.007
(0.15)
-0.011
(-0.31)

4189
0.118
2.394
0.091

4670
0.275
0.062
0.940

Table 5: The Eect of Board Characteristics on Abnormal Return

The dependent variable is the

estimated from the Fama-French-Carhart model. In specications (1)-(5) it is calculated

using 12 monthly returns; in specications (6)-(8) it is calculated using 250 daily returns. The explanatory variables are: (1)
Industry Experience of A liated and Independent directors, a ratio in [0; 1] indicating the proportion with past experience
relevant to the rms business; (2) Age of A liated and Independent directors, which proxies for general experience; (3)
Board Size, i.e., number of directors; (4) Board Independence, the proportion of directors with no relationship with the
rm; (5) Leverage, i..e, Debt over Assets; (6) Firm Size, i.e., Log Market Capitalization; (7) Capital Expenditures Over
Sales; (8) Collateralizable Assets, measured as (Inventory plus Net PPE) Over Assets; (9) Risk, measured as the St.Dev.
of daily returns; (10) Past ROA, measured as 3-year average of EBITDA Over Assets; (11) Free Cash Flows Over Assets;
(12) Number of Business Segments. All board characteristics (Industry Experience and Age of directors, and Board Size and
Independence) are suspected to be endogenous. Specications (1)-(3) and (6) show OLS estimations, and specications (4)-(5)
P
and (7)-(8) show GMM estimations. In GMM estimations the instruments for zit take the form xit = zit k t 1 k ts=1k zis .
In specications (4) and (7) we use k = 1, 2, while in (5) and (8) we use k = 3, 4. Diagnostic statistics are reported at

the bottom. For rm-xed-eects we report the Hausman test for xed versus random eects. For GMM we report tests
for Under-identication and Weak Identication and the Hansen test for overidentication. We also report tests against the
null of the error term being uncorrelated with its p th lag for p = 1, 2, 3, failure of which can render the instruments
utilizing p lagged values endogenous. Robust t-statistics are reported in parentheses. */**/*** indicate signicance at the
10%/5%/1% level, respectively.

Experience of Independents
Experience of A liated
Board Size
Board Independence
Age of A liated
Age of Independents
Leverage
Firm Size
CapEx Over Sales
Collateral
Risk
Past ROA
FCF Over Assets
Num Segments

(1)
0.016
(1.43)
-0.014
(-1.13)
0.010
(0.68)
-0.008
(-0.57)
-0.023**
(-1.98)
-0.027**
(-2.24)
0.001
(0.07)
-0.072***
(-5.43)
-0.009
(-0.42)
-0.012
(-0.61)
0.025
(1.22)
0.002
(0.09)
0.050**
(2.57)
0.028**
(2.47)

Firm Dummies
Industry Dummies
Year Dummies

Yes
Yes

N
R2

6420
0.014

Hausman p-val
UnderID p-val
Weak Instruments Stat
Hansen p-val
Corr Order 1 p-val
Corr Order 2 p-val
Corr Order 3 p-val

OLS
(2)
0.053*
(1.75)
-0.015
(-0.84)

(3)
0.054*
(1.78)
-0.004
(-0.21)
0.052*
(1.73)
-0.016
(-0.64)
0.012
(0.58)
0.015
(0.61)
0.004
(0.12)
-0.654*** -0.666***
(-13.56)
(-13.48)
-0.007
-0.004
(-0.14)
(-0.07)
0.076
0.074
(1.34)
(1.30)
-0.088**
-0.085**
(-2.24)
(-2.16)
0.007
0.009
(0.20)
(0.24)
0.107***
0.112***
(3.21)
(3.32)
0.036*
0.036*
(1.73)
(1.74)
Yes

Yes

Yes

Yes

6420
0.057

6420
0.058

0.000

0.000

GMM
(4)
(5)
0.136* 0.242**
(1.92) (2.09)
-0.044 -0.228
(-0.59) (-1.01)
-0.042
0.042
(-0.29) (0.13)
0.055
0.389
(0.54) (1.45)
-0.025
0.074
(-0.58) (0.67)
-0.001 -0.038
(-0.02) (-0.28)
0.006 -0.021
(0.24) (-0.52)
-0.086 -0.147
(-1.55) (-1.32)
0.021
0.001
(0.46) (0.02)
-0.039 -0.083*
(-1.13) (-1.85)
-0.020 -0.025
(-0.49) (-0.44)
0.001
0.038
(0.03) (0.75)
0.054
0.087
(1.42) (1.61)
0.039* 0.030
(1.69) (0.67)
Yes
Yes

Yes
Yes

4533

3103

OLS
(6)
0.057*
(1.91)
0.019
(0.98)
0.039
(1.37)
-0.019
(-0.78)
-0.001
(-0.04)
0.007
(0.33)
-0.040
(-1.38)
-0.962***
(-20.80)
0.020
(0.46)
0.103*
(1.93)
-0.013
(-0.33)
-0.022
(-0.59)
0.111***
(3.31)
0.039*
(1.96)
Yes
Yes
6420
0.130

GMM
(7)
(8)
0.089 0.118
(1.23) (0.97)
-0.036 -0.117
(-0.47) (-0.50)
-0.059 -0.345
(-0.41) (-1.03)
0.067 0.358
(0.63) (1.34)
-0.011 0.044
(-0.24) (0.39)
0.064 -0.060
(1.02) (-0.41)
-0.001 -0.022
(-0.03) (-0.54)
-0.065 0.011
(-1.16) (0.09)
0.046 0.032
(1.04) (0.52)
-0.035 -0.063
(-1.00) (-1.37)
0.064 0.020
(1.48) (0.31)
0.007 -0.027
(0.20) (-0.54)
0.032 0.060
(0.80) (1.07)
0.018 0.043
(0.76) (0.94)
Yes
Yes

Yes
Yes

4533

3103

0.000
6.722
0.370
0.240
0.012
0.286

0.076
1.080
0.917
0.013
0.074
0.364

0.000

46

0.000
6.722
0.261
0.355
0.805
0.162

0.076
1.080
0.937
0.104
0.163
0.795

Table 6: The Eect of Board Characteristics on Earnings Surprises

The dependent variable is Standardized Earnings Surprise, dened by S =

ea

ef
P0

, where ea and ef are the actual and

forecasted (by analysts) earnings per share, P0 is the rms stock price at the beginning of the scal year, and

is the average

inverse price-to-earnings ratio for the primary industry in which the rm operates. The explanatory variables are: (1) Industry
Experience of A liated and Independent directors, a ratio in [0; 1] indicating the proportion with past experience relevant to
the rms business; (2) Age of A liated and Independent directors, which proxies for general experience; (3) Board Size, i.e.,
number of directors; (4) Board Independence, the proportion of directors with no relationship with the rm; (5) Leverage,
i..e, Debt over Assets; (6) Firm Size, i.e., Log Market Capitalization; (7) Capital Expenditures Over Sales; (8) Collateralizable
Assets, measured as (Inventory plus Net PPE) Over Assets; (9) Risk, measured as the St.Dev. of daily returns; (10) Past ROA,
measured as 3-year average of EBITDA Over Assets; (11) Free Cash Flows Over Assets; (12) Number of Business Segments.
All board characteristics (Industry Experience and Age of directors, and Board Size and Independence) are suspected to be
endogenous. Specications (1)-(3) show OLS and (4)-(5) show GMM estimations. In GMM estimations the instruments for zit
P
take the form xit = zit k t 1 k ts=1k zis . In specications (4) and (5) we use k = 1, 2 and k = 2, 3, respectively. There is no

GMM specication, as in other tables, where instruments use k = 3, 4, because the model contains too few observations and is
therefore under-identied. Diagnostic statistics are reported at the bottom. For rm-xed-eects we report the Hausman test
for xed versus random eects. For GMM we report tests for Under-identication and Weak Identication and the Hansen
test for overidentication. We also report tests against the null of the error term being uncorrelated with its p th lag for
p = 1, 2, 3, failure of which can render the instruments utilizing p lagged values endogenous. Robust t-statistics are reported
in parentheses. */**/*** indicate signicance at the 10%/5%/1% level, respectively.
OLS
Experience of Independents
Experience of A liated
Board Size
Board Independence
Age of A liated
Age of Independents
Leverage
Firm Size
CapEx Over Sales
Collateral
Risk
Past ROA
FCF Over Assets
Num Segments
Firm Dummies
Industry Dummies
Year Dummies
N
R2
Hausman p-val
UnderID p-val
Weak Instruments Stat
Hansen p-val
Corr Order 1 p-val
Corr Order 2 p-val
Corr Order 3 p-val

(1)
0.013
(1.08)
0.002
(0.17)
-0.028*
(-1.87)
-0.030**
(-2.20)
-0.021*
(-1.70)
-0.029**
(-2.30)
-0.037**
(-2.48)
0.096***
(6.35)
0.080***
(3.12)
-0.043**
(-2.08)
-0.267***
(-10.78)
-0.096***
(-5.52)
0.082***
(3.56)
-0.051***
(-4.12)
Yes
Yes
5767
0.076

GMM

(2)
0.053*
(1.90)
0.011
(0.70)

(3)
0.048*
(1.70)
0.003
(0.18)
0.051*
(1.86)
0.023
(0.95)
-0.010
(-0.49)
-0.052**
(-2.50)
-0.030
(-0.88)
-0.043
-0.053
(-0.89)
(-1.06)
-0.066
-0.064
(-1.45)
(-1.42)
-0.003
-0.011
(-0.05)
(-0.17)
-0.286*** -0.282***
(-6.68)
(-6.61)
-0.171*** -0.171***
(-4.65)
(-4.65)
-0.007
-0.012
(-0.18)
(-0.33)
-0.028
-0.026
(-1.33)
(-1.25)
Yes

Yes

Yes

Yes

5767
0.059

5767
0.061

0.000

0.000

47

(4)
0.132**
(1.97)
0.082
(1.15)
0.271*
(1.92)
-0.063
(-0.61)
-0.004
(-0.10)
0.059
(1.01)
-0.025
(-0.80)
-0.002
(-0.04)
0.122***
(2.77)
-0.064*
(-1.84)
-0.204***
(-4.70)
-0.036
(-0.95)
0.083*
(1.80)
-0.080***
(-3.19)

(5)
0.027
(0.26)
0.213
(1.64)
0.061
(0.23)
-0.332*
(-1.84)
-0.018
(-0.26)
0.021
(0.23)
0.030
(0.73)
0.112
(1.14)
0.080
(1.63)
-0.049
(-1.17)
-0.244***
(-4.00)
-0.033
(-0.69)
-0.005
(-0.09)
-0.060
(-1.61)

Yes
Yes

Yes
Yes

4173

3536

0.000
6.526
0.451
0.192
0.554
0.23

0.001
2.036
0.528
0.466
0.814
0.962

Table 7: The Eect of Board Characteristics on Very Positive Earnings Surprises

The dependent variable is a dummy equal to 1 if Standardized Earnings Surprise is above the 25th percentile of the positive
part of its distribution. This dummy should capture true positive surprises rather than simply rms manipulating earnings
to just beat analysts expectations. The explanatory variables are: (1) Industry Experience of A liated and Independent
directors, a ratio in [0; 1] indicating the proportion with past experience relevant to the rms business; (2) Age of A liated and
Independent directors, which proxies for general experience; (3) Board Size, i.e., number of directors; (4) Board Independence,
the proportion of directors with no relationship with the rm; (5) Leverage, i..e, Debt over Assets; (6) Firm Size, i.e., Log
Market Capitalization; (7) Capital Expenditures Over Sales; (8) Collateralizable Assets, measured as (Inventory plus Net PPE)
Over Assets; (9) Risk, measured as the St.Dev. of daily returns; (10) Past ROA, measured as 3-year average of EBITDA Over
Assets; (11) Free Cash Flows Over Assets; (12) Number of Business Segments. All board characteristics (Industry Experience
and Age of directors, and Board Size and Independence) are suspected to be endogenous. Specications (1)-(3) show OLS
P
and (4)-(5) show GMM estimations. In GMM estimations the instruments for zit take the form xit = zit k t 1 k ts=1k zis .
In specications (4) and (5) we use k = 1, 2, and k = 2, 3, respectively. There is no GMM specication, as in other tables,
where instruments use k = 3, 4, because the model contains too few observations and is therefore under-identied. Diagnostic
statistics are reported at the bottom. For rm-xed-eects we report the Hausman test for xed versus random eects. For
GMM we report tests for Under-identication and Weak Identication and the Hansen test for overidentication. We also
report tests against the null of the error term being uncorrelated with its p th lag for p = 1, 2, 3, failure of which can render
the instruments utilizing p lagged values endogenous. Robust t-statistics are reported in parentheses. */**/*** indicate
signicance at the 10%/5%/1% level, respectively.
OLS
Experience of Independents
Experience of A liated
Board Size
Board Independence
Age of A liated
Age of Independents
Leverage
Firm Size
CapEx Over Sales
Collateral
Risk
Past ROA
FCF Over Assets
Num Segments
Firm Dummies
Industry Dummies
Year Dummies
N
R2
Hausman p-val
UnderID p-val
Weak Instruments Stat
Hansen p-val
Corr Order 1 p-val
Corr Order 2 p-val
Corr Order 3 p-val

(1)
0.013***
(2.69)
0.002
(0.41)
-0.011
(-1.48)
0.000
(0.02)
-0.007
(-1.35)
-0.013**
(-2.38)
-0.004
(-0.62)
-0.027***
(-4.36)
-0.012
(-1.39)
0.003
(0.32)
-0.024***
(-3.29)
-0.042***
(-6.01)
0.015*
(1.92)
0.007
(1.18)
Yes
Yes
5767
0.041

GMM

(2)
(3)
0.030**
0.027*
(2.01)
(1.85)
-0.001
-0.007
(-0.07)
(-0.72)
-0.003
(-0.20)
0.010
(0.78)
-0.014
(-1.27)
-0.019
(-1.55)
-0.012
(-0.82)
-0.194*** -0.192***
(-8.90)
(-8.65)
-0.074*** -0.075***
(-3.24)
(-3.26)
-0.009
-0.011
(-0.32)
(-0.39)
-0.048*** -0.048***
(-3.30)
(-3.29)
-0.098*** -0.098***
(-5.92)
(-5.96)
-0.003
-0.006
(-0.18)
(-0.42)
0.004
0.004
(0.32)
(0.35)
Yes

Yes

Yes

Yes

5767
0.072

5767
0.073

0.000

0.000

48

(4)
0.077**
(2.25)
0.002
(0.04)
0.024
(0.33)
-0.008
(-0.13)
-0.011
(-0.49)
-0.017
(-0.56)
-0.003
(-0.20)
-0.028
(-0.99)
-0.009
(-0.45)
0.001
(0.05)
-0.015
(-0.82)
-0.044***
(-2.63)
0.014
(0.80)
-0.001
(-0.07)

(5)
0.103**
(2.13)
-0.066
(-0.98)
0.024
(0.17)
0.014
(0.14)
-0.021
(-0.55)
-0.024
(-0.51)
0.003
(0.14)
-0.019
(-0.38)
-0.013
(-0.53)
0.004
(0.21)
-0.026
(-0.94)
-0.038*
(-1.82)
-0.006
(-0.25)
-0.006
(-0.34)

Yes
Yes

Yes
Yes

4173

3536

0.000
6.526
0.694
0.021
0.664
0.716

0.001
2.036
0.774
0.028
0.820
0.680

Table 8: The Eect of Board Characteristics on Covariance with HML Factor

The dependent variable is the loading on the High-Minus-Low (HML) factor, a portfolio long on high and short on low
book-to-market stocks. The loading on HML is estimated from the Fama-French-Carhart model. In specications (1)-(5)
it is calculated using 12 monthly returns; in specications (6)-(8) it is calculated using 250 daily returns. The explanatory
variables are: (1) Industry Experience of A liated and Independent directors, a ratio in [0; 1] indicating the proportion with
past experience relevant to the rms business; (2) Age of A liated and Independent directors, which proxies for general
experience; (3) Board Size, i.e., number of directors; (4) Board Independence, the proportion of directors with no relationship
with the rm; (5) Leverage, i..e, Debt over Assets; (6) Firm Size, i.e., Log Market Capitalization; (7) Capital Expenditures
Over Sales; (8) Collateralizable Assets, measured as (Inventory plus Net PPE) Over Assets; (9) Risk, measured as the St.Dev.
of daily returns; (10) Past ROA, measured as 3-year average of EBITDA Over Assets; (11) Free Cash Flows Over Assets;
(12) Number of Business Segments. All board characteristics (Industry Experience and Age of directors, and Board Size and
Independence) are suspected to be endogenous. Specications (1)-(3) and (6) show OLS estimations, and specications (4)-(5)
P
and (7)-(8) show GMM estimations. In GMM estimations the instruments for zit take the form xit = zit k t 1 k ts=1k zis .

In specications (4) and (7) we use k = 1, 2, while in (5) and (8) we use k = 3, 4. Diagnostic statistics are reported at
the bottom. For rm-xed-eects we report the Hausman test for xed versus random eects. For GMM we report tests
for Under-identication and Weak Identication and the Hansen test for overidentication. We also report tests against the
null of the error term being uncorrelated with its p th lag for p = 1, 2, 3, failure of which can render the instruments
utilizing p lagged values endogenous. Robust t-statistics are reported in parentheses. */**/*** indicate signicance at the
10%/5%/1% level, respectively.

Experience of Independents
Experience of A liated
Board Size
Board Independence
Age of A liated
Age of Independents
Leverage
Firm Size
CapEx Over Sales
Collateral
Risk
Past ROA
FCF Over Assets
Num Segments
Firm Dummies
Industry Dummies
Year Dummies
N
R2
Hausman p-val
UnderID p-val
Weak Instruments Stat
Hansen p-val
Corr Order 1 p-val
Corr Order 2 p-val
Corr Order 3 p-val

(1)
-0.033***
(-2.94)
0.016
(1.30)
0.036***
(2.58)
-0.008
(-0.66)
0.023*
(1.93)
0.032***
(2.79)
0.027**
(1.98)
-0.081***
(-6.38)
-0.024
(-1.07)
0.045**
(2.29)
-0.064***
(-3.37)
0.040**
(2.22)
-0.096***
(-4.65)
0.013
(1.14)
Yes
Yes
6420
0.026

OLS
(2)
(3)
-0.065** -0.057**
(-2.30)
(-2.04)
0.014
0.025
(0.86)
(1.34)
-0.041
(-1.39)
-0.012
(-0.48)
0.044**
(2.04)
0.036
(1.60)
-0.008
(-0.25)
-0.096** -0.102**
(-2.19)
(-2.25)
-0.016
-0.017
(-0.34)
(-0.36)
0.044
0.042
(0.82)
(0.77)
0.037
0.036
(1.04)
(1.02)
0.036
0.034
(0.99)
(0.94)
-0.126*** -0.124***
(-3.72)
(-3.62)
0.004
0.005
(0.20)
(0.24)
Yes

Yes

Yes

Yes

6420
0.033

6420
0.035

0.000

0.000

GMM
(4)
(5)
-0.120*
-0.019
(-1.68)
(-0.13)
0.073
0.017
(0.94)
(0.06)
-0.308** -0.677*
(-2.08)
(-1.73)
-0.086
-0.033
(-0.76)
(-0.10)
0.013
0.064
(0.29)
(0.48)
0.002
-0.272
(0.03)
(-1.64)
0.062**
0.046
(2.33)
(0.95)
0.091
0.220
(1.60)
(1.61)
-0.024
-0.048
(-0.50)
(-0.66)
0.113*** 0.139***
(3.30)
(2.58)
-0.074*
-0.020
(-1.83)
(-0.30)
0.029
-0.030
(0.78)
(-0.52)
-0.178*** -0.179***
(-4.25)
(-2.66)
0.057**
0.107**
(2.33)
(1.97)
Yes
Yes

Yes
Yes

4533

3103

OLS
(6)
-0.002
(-0.09)
-0.001
(-0.06)
0.028
(1.15)
-0.024
(-1.19)
0.052***
(3.20)
0.050***
(2.85)
-0.023
(-0.95)
-0.190***
(-4.94)
-0.124***
(-3.12)
0.083*
(1.84)
0.066**
(2.42)
0.012
(0.40)
-0.196***
(-7.21)
0.009
(0.55)
Yes
Yes
6420
0.138

GMM
(7)
(8)
-0.122**
-0.188*
(-2.05)
(-1.74)
0.109*
0.318
(1.76)
(1.60)
-0.280**
-0.369
(-2.31)
(-1.23)
-0.110
-0.188
(-1.25)
(-0.79)
-0.102*** -0.160
(-2.85)
(-1.58)
-0.009
-0.187
(-0.17)
(-1.42)
0.060*** 0.040
(2.69)
(1.06)
-0.079*
-0.037
(-1.71)
(-0.35)
-0.092*** -0.140**
(-2.59)
(-2.57)
0.190*** 0.196***
(6.95)
(4.78)
-0.094*** -0.022
(-2.73)
(-0.41)
0.010
0.031
(0.36)
(0.68)
-0.157*** -0.169***
(-5.11)
(-3.40)
0.126*** 0.145***
(6.39)
(3.54)
Yes
Yes

Yes
Yes

4533

3103

0.000

49

0.000
6.722
0.862
0.929
0.571
0.126

0.076
1.080
0.320
0.461
0.656
0.907

0.000
6.722
0.641
0.059
0.019
0.011

0.076
1.080
0.477
0.390
0.735
0.370

Table 9: The Eect of Board Characteristics on the Probability of Financial Distress

The dependent variable is Altmans (1960) z-score as updated by Hillegeist et al (2004), dened as
RE
TA

0:10

EBIT
TA

0:22

VE
TL

+0:06

S
,
TA

4:34

0:08

WC
TA

+ 0:04

where W C is working capital, T A is book value of assets, RE is retained earnings, EBIT

is earnings before interest and taxes, V E is market value of equity, T L is total liabilities; and S is net sales. The explanatory
variables are: (1) Industry Experience of A liated and Independent directors, a ratio in [0; 1] indicating the proportion with
past experience relevant to the rms business; (2) Age of A liated and Independent directors, which proxies for general
experience; (3) Board Size, i.e., number of directors; (4) Board Independence, the proportion of directors with no relationship
with the rm; (5) Leverage, i..e, Debt over Assets; (6) Firm Size, i.e., Log Market Capitalization; (7) Capital Expenditures
Over Sales; (8) Collateralizable Assets, measured as (Inventory plus Net PPE) Over Assets; (9) Risk, measured as the St.Dev.
of daily returns; (10) Past ROA, measured as 3-year average of EBITDA Over Assets; (11) Free Cash Flows Over Assets;
(12) Number of Business Segments. All board characteristics (Industry Experience and Age of directors, and Board Size
and Independence) are suspected to be endogenous. Specications (1)-(3) show OLS and (4)-(6) show GMM estimations. In
P
GMM estimations the instruments for zit take the form xit = zit k t 1 k ts=1k zis . In specications (4), (5), and (6) we use

k = 1, 2, k = 2, 3, and k = 3, 4, respectively. Diagnostic statistics are reported at the bottom. For rm-xed-eects we report
the Hausman test for xed versus random eects. For GMM we report tests for Under-identication and Weak Identication
and the Hansen test for overidentication. We also report tests against the null of the error term being uncorrelated with its
p th lag for p = 1, 2, 3, failure of which can render the instruments utilizing p lagged values endogenous. Robust t-statistics
are reported in parentheses. */**/*** indicate signicance at the 10%/5%/1% level, respectively.
OLS
Experience of Independents
Experience of A liated
Board Size
Board Independence
Age of A liated
Age of Independents
Leverage
Firm Size
CapEx Over Sales
Collateral
Risk
Past ROA
FCF Over Assets
Num Segments
Firm Dummies
Industry Dummies
Year Dummies
N
R2
Hausman p-val
UnderID p-val
Weak Instruments Stat
Hansen p-val
Corr Order 1 p-val
Corr Order 2 p-val
Corr Order 3 p-val

(1)
-0.031***
(-4.61)
-0.021**
(-2.56)
0.150***
(15.89)
0.102***
(11.82)
0.019***
(2.63)
0.013*
(1.69)
0.375***
(40.31)
-0.149***
(-17.11)
-0.262***
(-19.39)
0.218***
(16.30)
-0.062***
(-5.69)
-0.044***
(-4.06)
-0.219***
(-17.06)
0.118***
(15.39)
Yes
Yes
6421
0.391

GMM

(2)
-0.016
(-1.09)
-0.002
(-0.31)

-0.243***
(-12.57)
-0.098***
(-4.48)
-0.035
(-1.26)
0.092***
(6.72)
-0.017
(-0.97)
-0.205***
(-13.52)
0.011
(1.14)

(3)
-0.022
(-1.54)
-0.002
(-0.24)
0.018
(1.27)
0.021*
(1.95)
0.004
(0.49)
0.015
(1.46)
0.231***
(15.89)
-0.194***
(-10.04)
-0.096***
(-4.62)
-0.001
(-0.03)
0.088***
(6.65)
0.003
(0.20)
-0.174***
(-11.88)
-0.010
(-1.08)

Yes

Yes

Yes

Yes

6241
0.201

6241
0.260

0.000

0.000

50

(4)
-0.174***
(-3.25)
0.067
(1.16)
-0.434***
(-3.84)
-0.050
(-0.59)
-0.103***
(-3.17)
-0.128***
(-2.74)
0.421***
(18.52)
0.041
(0.94)
-0.356***
(-11.46)
0.263***
(8.83)
-0.151***
(-5.35)
-0.201***
(-7.08)
-0.339***
(-11.96)
0.141***
(7.51)

(5)
-0.255***
(-3.48)
0.131
(1.43)
-0.330
(-1.50)
-0.004
(-0.03)
-0.140***
(-2.65)
-0.099
(-1.47)
0.397***
(14.16)
-0.008
(-0.10)
-0.327***
(-8.54)
0.232***
(6.59)
-0.110***
(-2.74)
-0.202***
(-6.05)
-0.320***
(-8.78)
0.123***
(4.25)

Yes
Yes

Yes
Yes

Yes
Yes

4396

3686

3007

0.000
6.275
0.712
0.000
0.248
0.263

0.006
1.687
0.444
0.005
0.949
0.021

(6)
-0.218**
(-2.52)
0.319**
(2.07)
0.104
(0.43)
-0.031
(-0.18)
-0.103
(-1.37)
-0.012
(-0.12)
0.372***
(12.55)
-0.133
(-1.64)
-0.265***
(-6.36)
0.221***
(5.90)
-0.003
(-0.09)
-0.167***
(-4.82)
-0.277***
(-7.38)
0.081**
(2.56)

0.059
1.158
0.684
0.0163
0.659
0.039

Table 10: The Eect of Board Characteristics on Covariance with Market

The dependent variable is the

estimated from the Fama-French-Carhart model. In specications (1)-(5) it is calculated

using 12 monthly returns; in specications (6)-(8) it is calculated using 250 daily returns. The explanatory variables are: (1)
Industry Experience of A liated and Independent directors, a ratio in [0; 1] indicating the proportion with past experience
relevant to the rms business; (2) Age of A liated and Independent directors, which proxies for general experience; (3)
Board Size, i.e., number of directors; (4) Board Independence, the proportion of directors with no relationship with the
rm; (5) Leverage, i..e, Debt over Assets; (6) Firm Size, i.e., Log Market Capitalization; (7) Capital Expenditures Over
Sales; (8) Collateralizable Assets, measured as (Inventory plus Net PPE) Over Assets; (9) Risk, measured as the St.Dev.
of daily returns; (10) Past ROA, measured as 3-year average of EBITDA Over Assets; (11) Free Cash Flows Over Assets;
(12) Number of Business Segments. All board characteristics (Industry Experience and Age of directors, and Board Size and
Independence) are suspected to be endogenous. Specications (1)-(3) and (6) show OLS estimations, and specications (4)-(5)
P
and (7)-(8) show GMM estimations. In GMM estimations the instruments for zit take the form xit = zit k t 1 k ts=1k zis .
In specications (4) and (7) we use k = 1, 2, while in (5) and (8) we use k = 3, 4. Diagnostic statistics are reported at
the bottom. For rm-xed-eects we report the Hausman test for xed versus random eects. For GMM we report tests
for Under-identication and Weak Identication and the Hansen test for overidentication. We also report tests against the
null of the error term being uncorrelated with its p th lag for p = 1, 2, 3, failure of which can render the instruments
utilizing p lagged values endogenous. Robust t-statistics are reported in parentheses. */**/*** indicate signicance at the
10%/5%/1% level, respectively.

Experience of Independents
Experience of A liated
Board Size
Board Independence
Age of A liated
Age of Independents
Leverage
Firm Size
CapEx Over Sales
Collateral
Risk
Past ROA
FCF Over Assets
Num Segments
Firm Dummies
Industry Dummies
Year Dummies
N
R2
Hausman p-val
UnderID p-val
Weak Instruments Stat
Hansen p-val
Corr Order 1 p-val
Corr Order 2 p-val
Corr Order 3 p-val

(1)
0.001
(0.10)
0.004
(0.31)
-0.028**
(-2.00)
0.011
(0.89)
0.004
(0.30)
0.042***
(3.50)
0.017
(1.20)
0.047***
(3.51)
0.004
(0.16)
0.019
(0.98)
0.117***
(6.05)
-0.031*
(-1.69)
-0.027
(-1.33)
-0.017
(-1.43)
Yes
Yes
6420
0.017

OLS
(2)
-0.026
(-0.87)
0.030*
(1.80)

GMM
(4)
(5)
-0.095
-0.223*
(-1.23)
(-1.68)
0.019
0.161
(0.24)
(0.63)
0.061
-0.053
(0.42)
(-0.15)
0.160
-0.177
(1.41)
(-0.60)
-0.004
-0.031
(-0.09)
(-0.25)
0.032
0.200
(0.48)
(1.24)
0.019
0.059
(0.72)
(1.31)
0.006
0.076
(0.11)
(0.60)
0.001
-0.023
(0.02)
(-0.31)
0.073**
0.068
(2.10)
(1.29)
0.133*** 0.145**
(3.30)
(2.29)
-0.017
-0.042
(-0.46)
(-0.76)
-0.033
-0.019
(-0.82)
(-0.30)
-0.040*
-0.013
(-1.65)
(-0.25)

(3)
-0.026
(-0.87)
0.017
(0.88)
-0.023
(-0.80)
0.035
(1.40)
-0.002
(-0.11)
0.004
(0.17)
-0.022
(-0.73)
0.077*
0.075
(1.74)
(1.63)
-0.012
-0.013
(-0.25)
(-0.25)
0.033
0.030
(0.64)
(0.57)
0.125*** 0.125***
(3.49)
(3.50)
-0.083** -0.085**
(-2.26)
(-2.32)
-0.072** -0.077**
(-2.18)
(-2.28)
-0.024
-0.023
(-1.18)
(-1.12)
Yes

Yes

Yes

Yes

6420
0.018

6420
0.019

0.004

0.019

Yes
Yes

Yes
Yes

4533

3103

OLS
(6)
0.020
(0.76)
-0.025
(-1.52)
0.010
(0.41)
0.027
(1.29)
0.014
(0.77)
0.029
(1.47)
-0.024
(-0.90)
-0.019
(-0.48)
-0.016
(-0.38)
0.049
(1.02)
0.471***
(16.10)
-0.098***
(-3.14)
-0.091***
(-3.19)
0.018
(0.98)
Yes
Yes
6420
0.104

GMM
(7)
(8)
0.085
0.118
(1.37)
(1.09)
-0.004
-0.034
(-0.07)
(-0.18)
0.157
0.300
(1.29)
(1.10)
0.125
0.084
(1.38)
(0.36)
-0.037
-0.094
(-0.99)
(-1.01)
0.109**
0.219*
(2.03)
(1.77)
-0.003
-0.027
(-0.16)
(-0.75)
0.042
0.015
(0.91)
(0.15)
0.018
-0.066
(0.52)
(-1.45)
0.097*** 0.105***
(3.47)
(2.72)
0.468*** 0.462***
(14.34)
(9.30)
-0.051*
-0.028
(-1.70)
(-0.65)
-0.051
-0.055
(-1.52)
(-1.13)
-0.004
-0.029
(-0.19)
(-0.74)
Yes
Yes

Yes
Yes

4533

3103

0.061

51

0.000
6.722
0.284
0.389
0.09
0.228

0.076
1.080
0.072
0.467
0.796
0.605

0.000
6.722
0.785
0.007
0.296
0.068

0.076
1.080
0.236
0.646
0.907
0.165

Table 11: The Eect of Board Characteristics on Covariance with SMB Factor
The dependent variable is the loading on the Small-Minus-Big (SMB) factor, a portfolio long on low and short on high
market value stocks. The loading on SMB is estimated from the Fama-French-Carhart model. In specications (1)-(5) it
is calculated using 12 monthly returns; in specications (6)-(8) it is calculated using 250 daily returns. The explanatory
variables are: (1) Industry Experience of A liated and Independent directors, a ratio in [0; 1] indicating the proportion with
past experience relevant to the rms business; (2) Age of A liated and Independent directors, which proxies for general
experience; (3) Board Size, i.e., number of directors; (4) Board Independence, the proportion of directors with no relationship
with the rm; (5) Leverage, i..e, Debt over Assets; (6) Firm Size, i.e., Log Market Capitalization; (7) Capital Expenditures
Over Sales; (8) Collateralizable Assets, measured as (Inventory plus Net PPE) Over Assets; (9) Risk, measured as the St.Dev.
of daily returns; (10) Past ROA, measured as 3-year average of EBITDA Over Assets; (11) Free Cash Flows Over Assets;
(12) Number of Business Segments. All board characteristics (Industry Experience and Age of directors, and Board Size
and Independence) are suspected to be endogenous. Specications (1)-(3) and (6) show OLS, and specications (4)-(5) and
Pt k
1
(7)-(8) show GMM estimations. In GMM estimations the instruments for zit take the form xit = zit k
s=1 zis . In
t k

specications (4) and (7) we use k = 1, 2, while in (5) and (8) we use k = 3, 4. Diagnostic statistics are reported at the
bottom. For rm-xed-eects we report the Hausman test for xed versus random eects. For GMM we report tests for
Under-identication and Weak Identication and the Hansen test for overidentication. We also report tests against the
null of the error term being uncorrelated with its p th lag for p = 1, 2, 3, failure of which can render the instruments
utilizing p lagged values endogenous. Robust t-statistics are reported in parentheses. */**/*** indicate signicance at the
10%/5%/1% level, respectively.

Experience of Independents
Experience of A liated
Board Size
Board Independence
Age of A liated
Age of Independents
Leverage
Firm Size
CapEx Over Sales
Collateral
Risk
Past ROA
FCF Over Assets
Num Segments
Firm Dummies
Industry Dummies
Year Dummies
N
R2
Hausman p-val
UnderID p-val
Weak Instruments Stat
Hansen p-val
Corr Order 1 p-val
Corr Order 2 p-val
Corr Order 3 p-val

(1)
-0.010
(-0.93)
0.003
(0.25)
0.037***
(2.70)
0.006
(0.47)
-0.001
(-0.06)
-0.016
(-1.34)
-0.008
(-0.57)
-0.182***
(-14.24)
-0.031
(-1.43)
0.032*
(1.66)
0.161***
(8.39)
0.014
(0.80)
-0.055***
(-2.85)
0.021*
(1.80)
Yes
Yes
6420
0.062

OLS
(2)
0.015
(0.48)
0.018
(1.06)

GMM
(4)
(5)
0.062
0.000
(0.84)
(0.00)
-0.023
0.168
(-0.32)
(0.67)
0.103
0.263
(0.72)
(0.71)
0.066
0.201
(0.62)
(0.66)
0.075*
0.145
(1.69)
(1.17)
0.097
0.019
(1.53)
(0.12)
-0.016
-0.060
(-0.65)
(-1.38)
-0.189*** -0.231*
(-3.47)
(-1.77)
0.038
0.112*
(0.86)
(1.67)
0.037
-0.011
(1.11)
(-0.22)
0.160*** 0.257***
(4.15)
(4.22)
0.024
0.022
(0.71)
(0.43)
-0.051
-0.042
(-1.39)
(-0.72)
0.006
-0.018
(0.27)
(-0.36)

(3)
0.016
(0.51)
0.014
(0.73)
0.033
(1.15)
0.019
(0.76)
0.001
(0.06)
0.049**
(2.17)
-0.006
(-0.20)
-0.206*** -0.222***
(-4.74)
(-4.98)
-0.029
-0.025
(-0.60)
(-0.53)
0.023
0.020
(0.44)
(0.38)
0.096**
0.100***
(2.57)
(2.66)
0.038
0.040
(1.10)
(1.14)
-0.064** -0.060*
(-2.04)
(-1.91)
0.019
0.019
(0.94)
(0.97)
Yes

Yes

Yes

Yes

6420
0.027

6420
0.028

0.012

0.028

Yes
Yes

Yes
Yes

4533

3103

OLS
(6)
0.019
(0.88)
-0.020
(-1.47)
0.023
(1.09)
0.017
(0.98)
-0.022
(-1.47)
0.010
(0.62)
0.002
(0.08)
-0.326***
(-9.41)
-0.030
(-0.85)
0.014
(0.36)
0.290***
(10.51)
-0.086***
(-3.54)
-0.083***
(-3.56)
-0.004
(-0.25)
Yes
Yes
6420
0.110

GMM
(7)
(8)
0.092*
0.108
(1.71)
(1.14)
-0.041
-0.126
(-0.69)
(-0.67)
0.356*** 0.468*
(3.27)
(1.69)
0.086
-0.027
(1.04)
(-0.12)
0.065*
0.142
(1.90)
(1.48)
0.115**
0.048
(2.48)
(0.41)
-0.022
-0.011
(-1.07)
(-0.34)
-0.565*** -0.574***
(-13.57)
(-5.93)
0.004
-0.086*
(0.14)
(-1.81)
0.016
0.031
(0.63)
(0.81)
0.392*** 0.402***
(12.45)
(7.87)
0.017
0.050
(0.62)
(1.21)
-0.038
-0.084*
(-1.26)
(-1.80)
-0.033*
-0.041
(-1.76)
(-1.08)
Yes
Yes

Yes
Yes

4533

3103

0.000

52

0.000
6.722
0.760
0.695
0.300
0.271

0.076
1.080
0.795
0.710
0.972
0.457

0.000
6.722
0.180
0.04
0.054
0.716

0.076
1.080
0.197
0.000
0.308
0.000

Table 12: The Eect of Board Characteristics on Covariance with UMD Factor
The dependent variable is the loading on the Up-Minus-Down (UMD) factor, a portfolio that is ong on high and short on
low prior return stocks. The loading on UMD is estimated from the Fama-French-Carhart model. In specications (1)-(5)
it is calculated using 12 monthly returns; in specications (6)-(8) it is calculated using 250 daily returns. The explanatory
variables are: (1) Industry Experience of A liated and Independent directors, a ratio in [0; 1] indicating the proportion with
past experience relevant to the rms business; (2) Age of A liated and Independent directors, which proxies for general
experience; (3) Board Size, i.e., number of directors; (4) Board Independence, the proportion of directors with no relationship
with the rm; (5) Leverage, i..e, Debt over Assets; (6) Firm Size, i.e., Log Market Capitalization; (7) Capital Expenditures
Over Sales; (8) Collateralizable Assets, measured as (Inventory plus Net PPE) Over Assets; (9) Risk, measured as the St.Dev.
of daily returns; (10) Past ROA, measured as 3-year average of EBITDA Over Assets; (11) Free Cash Flows Over Assets;
(12) Number of Business Segments. All board characteristics (Industry Experience and Age of directors, and Board Size and
Independence) are suspected to be endogenous. Specications (1)-(3) and (6) show OLS estimations, and specications (4)-(5)
P
and (7)-(8) show GMM estimations. In GMM estimations the instruments for zit take the form xit = zit k t 1 k ts=1k zis .

In specications (4) and (7) we use k = 1, 2, while in (5) and (8) we use k = 3, 4. Diagnostic statistics are reported at
the bottom. For rm-xed-eects we report the Hausman test for xed versus random eects. For GMM we report tests
for Under-identication and Weak Identication and the Hansen test for overidentication. We also report tests against the
null of the error term being uncorrelated with its p th lag for p = 1, 2, 3, failure of which can render the instruments
utilizing p lagged values endogenous. Robust t-statistics are reported in parentheses. */**/*** indicate signicance at the
10%/5%/1% level, respectively.

Experience of Independents
Experience of A liated
Board Size
Board Independence
Age of A liated
Age of Independents
Leverage
Firm Size
CapEx Over Sales
Collateral
Risk
Past ROA
FCF Over Assets
Num Segments
Firm Dummies
Industry Dummies
Year Dummies
N
R2
Hausman p-val
UnderID p-val
Weak Instruments Stat
Hansen p-val
Corr Order 1 p-val
Corr Order 2 p-val
Corr Order 3 p-val

(1)
0.002
(0.13)
0.015
(1.25)
-0.008
(-0.60)
-0.016
(-1.23)
-0.009
(-0.74)
-0.005
(-0.40)
-0.038***
(-2.72)
-0.032**
(-2.47)
-0.003
(-0.12)
0.004
(0.19)
-0.116***
(-6.05)
-0.064***
(-3.56)
0.072***
(3.55)
-0.002
(-0.16)
Yes
Yes
6420
0.014

OLS
(2)
-0.019
(-0.62)
0.033*
(1.90)

GMM
(4)
(5)
-0.010
-0.195
(-0.14)
(-1.36)
0.019
0.387
(0.25)
(1.44)
0.131
0.379
(0.89)
(1.02)
0.025
-0.324
(0.23)
(-1.03)
-0.055
-0.156
(-1.22)
(-1.22)
0.008
0.222
(0.12)
(1.37)
-0.063** -0.024
(-2.40)
(-0.51)
-0.100*
-0.170
(-1.77)
(-1.31)
0.013
0.053
(0.29)
(0.74)
0.024
-0.001
(0.77)
(-0.01)
-0.109*** -0.085
(-2.69)
(-1.29)
-0.063*
-0.058
(-1.72)
(-1.00)
0.086**
0.166***
(2.16)
(2.59)
-0.024
-0.044
(-0.99)
(-0.84)

(3)
-0.023
(-0.78)
0.033*
(1.67)
0.007
(0.24)
-0.031
(-1.23)
-0.049**
(-2.38)
-0.037
(-1.64)
-0.029
(-0.89)
-0.059
-0.054
(-1.22)
(-1.08)
-0.131*** -0.134***
(-2.72)
(-2.80)
-0.014
-0.014
(-0.25)
(-0.25)
-0.097** -0.099**
(-2.50)
(-2.55)
-0.054
-0.056
(-1.48)
(-1.54)
0.022
0.014
(0.64)
(0.41)
0.008
0.010
(0.36)
(0.49)
Yes

Yes

Yes

Yes

6420
0.014

6420
0.016

0.000

0.000

Yes
Yes

Yes
Yes

4533

3103

OLS
(6)
-0.050
(-1.56)
0.025
(1.31)
-0.011
(-0.35)
-0.040
(-1.60)
-0.017
(-0.84)
-0.058***
(-2.59)
-0.052*
(-1.68)
-0.304***
(-6.59)
-0.271***
(-5.53)
0.135**
(2.40)
-0.326***
(-9.40)
0.024
(0.68)
0.041
(1.21)
0.021
(1.01)
Yes
Yes
6420
0.099

GMM
(7)
(8)
0.110
0.102
(1.63)
(0.87)
0.031
-0.166
(0.44)
(-0.74)
-0.014
0.140
(-0.10)
(0.45)
0.002
0.188
(0.02)
(0.73)
0.006
0.011
(0.15)
(0.10)
-0.050
-0.087
(-0.92)
(-0.65)
-0.025
-0.038
(-1.07)
(-1.00)
-0.031
-0.096
(-0.60)
(-0.90)
-0.043
-0.007
(-1.00)
(-0.12)
0.067**
0.051
(2.19)
(1.22)
-0.271*** -0.306***
(-7.17)
(-5.60)
-0.059*
-0.104**
(-1.72)
(-2.18)
0.036
0.109**
(0.99)
(2.07)
-0.008
-0.015
(-0.34)
(-0.36)
Yes
Yes

Yes
Yes

4533

3103

0.000

53

0.000
6.722
0.507
0.233
0.004
0.704

0.076
1.080
0.062
0.240
0.065
0.423

0.000
6.722
0.197
0.000
0.000
0.003

0.076
1.080
0.098
0.000
0.012
0.313

Table 13: The Eect of Board Characteristics on Accruals

The dependent variable is accruals, dened by Collins and Hribar (2002) as T ACCcf = EBXI

CF Ocf , where EBXI

is Earnings Before Extraordinary Items and Discontinued Operations (Compustat Item 123) and CF Ocf is Operating Cash
Flows from Continuing Operations (Compustat Item 308 minus data Item 124). The explanatory variables are: (1) Industry
Experience of A liated and Independent directors, a ratio in [0; 1] indicating the proportion with past experience relevant to
the rms business; (2) Age of A liated and Independent directors, which proxies for general experience; (3) Board Size, i.e.,
number of directors; (4) Board Independence, the proportion of directors with no relationship with the rm; (5) Leverage,
i..e, Debt over Assets; (6) Firm Size, i.e., Log Market Capitalization; (7) Capital Expenditures Over Sales; (8) Collateralizable
Assets, measured as (Inventory plus Net PPE) Over Assets; (9) Risk, measured as the St.Dev. of daily returns; (10) Past ROA,
measured as 3-year average of EBITDA Over Assets; (11) Free Cash Flows Over Assets; (12) Number of Business Segments.
All board characteristics (Industry Experience and Age of directors, and Board Size and Independence) are suspected to be
endogenous. Specications (1)-(3) show OLS and (4)-(6) show GMM estimations. In GMM estimations the instruments for
Pt k
1
zit take the form xit = zit k
s=1 zis . In specications (4), (5), and (6) we use k = 1, 2, k = 2, 3, and k = 3, 4,
t k
respectively. Diagnostic statistics are reported at the bottom. For rm-xed-eects we report the Hausman test for xed

versus random eects. For GMM we report tests for Under-identication and Weak Identication and the Hansen test for
overidentication. We also report tests against the null of the error term being uncorrelated with its p th lag for p = 1,
2, 3, failure of which can render the instruments utilizing p lagged values endogenous. Robust t-statistics are reported in
parentheses. */**/*** indicate signicance at the 10%/5%/1% level, respectively.
OLS
Experience of Independents
Experience of A liated
Board Size
Board Independence
Age of A liated
Age of Independents
Leverage
Firm Size
CapEx Over Sales
Collateral
Risk
Past ROA
FCF Over Assets
Num Segments
Firm Dummies
Industry Dummies
Year Dummies
N
R2
Hausman p-val
UnderID p-val
Weak Instruments Stat
Hansen p-val
Corr Order 1 p-val
Corr Order 2 p-val
Corr Order 3 p-val

(1)
-0.039***
(-3.57)
0.057***
(5.05)
-0.007
(-0.55)
-0.052***
(-4.38)
0.041***
(3.93)
0.053***
(4.65)
0.013
(0.95)
-0.011
(-0.86)
-0.006
(-0.29)
0.002
(0.10)
-0.082***
(-4.61)
-0.133***
(-6.70)
0.240***
(10.36)
0.053***
(5.04)
Yes
Yes
6220
0.083

GMM

(2)
(3)
-0.038
-0.038
(-1.48)
(-1.46)
0.025**
0.031**
(2.06)
(2.20)
-0.025
(-1.21)
-0.016
(-0.87)
0.006
(0.45)
-0.021
(-1.19)
0.023
(0.86)
0.156*** 0.169***
(3.87)
(4.07)
0.146*** 0.144***
(3.31)
(3.25)
0.037
0.042
(0.74)
(0.84)
0.033
0.030
(1.21)
(1.12)
-0.045
-0.045
(-1.20)
(-1.21)
0.164*** 0.166***
(4.72)
(4.72)
0.004
0.002
(0.26)
(0.13)
Yes

Yes

Yes

Yes

6220
0.058

6220
0.059

0.000

0.000

54

(4)
-0.154**
(-2.42)
0.009
(0.14)
-0.182
(-1.64)
0.040
(0.46)
-0.007
(-0.21)
-0.051
(-0.99)
0.005
(0.24)
0.082*
(1.90)
0.017
(0.51)
0.024
(0.82)
-0.153***
(-4.48)
-0.256***
(-7.70)
0.182***
(5.04)
0.026
(1.42)

(5)
-0.189**
(-2.14)
0.024
(0.23)
-0.129
(-0.58)
0.179
(1.12)
-0.014
(-0.25)
-0.048
(-0.60)
-0.006
(-0.22)
0.049
(0.62)
0.052
(1.21)
-0.009
(-0.25)
-0.127***
(-2.61)
-0.238***
(-5.78)
0.203***
(4.50)
0.012
(0.41)

Yes
Yes

Yes
Yes

Yes
Yes

4386

3679

3002

0.000
6.737
0.645
0.063
0.645
0.599

0.001
1.998
0.758
0.453
0.068
0.785

(6)
-0.228*
(-1.84)
0.109
(0.56)
-0.522*
(-1.71)
-0.004
(-0.01)
-0.105
(-0.93)
-0.163
(-1.32)
0.036
(0.86)
0.184*
(1.70)
0.041
(0.69)
0.011
(0.24)
-0.206***
(-3.68)
-0.267***
(-5.24)
0.175***
(3.05)
0.053
(1.26)

0.070
1.103
0.189
0.406
0.018
0.846

Table 14: The Eect of Board Characteristics on Income Restatements

The dependent variable is Income Restatements (Compustat Item 123). The explanatory variables are: (1) Industry Experience of A liated and Independent directors, a ratio in [0; 1] indicating the proportion with past experience relevant to
the rms business; (2) Age of A liated and Independent directors, which proxies for general experience; (3) Board Size, i.e.,
number of directors; (4) Board Independence, the proportion of directors with no relationship with the rm; (5) Leverage,
i..e, Debt over Assets; (6) Firm Size, i.e., Log Market Capitalization; (7) Capital Expenditures Over Sales; (8) Collateralizable
Assets, measured as (Inventory plus Net PPE) Over Assets; (9) Risk, measured as the St.Dev. of daily returns; (10) Past
ROA, measured as 3-year average of EBITDA Over Assets; (11) Free Cash Flows Over Assets; (12) Number of Business Segments. All board characteristics (Industry Experience and Age of directors, and Board Size and Independence) are suspected
to be endogenous. Specications (1)-(3) show OLS and (4)-(6) show GMM estimations. In GMM estimations the instruments
Pt k
1
for zit take the form xit = zit k
s=1 zis . In specications (4), (5), and (6) we use k = 1, 2, k = 2, 3, and k = 3,
t k
4, respectively. Diagnostic statistics are reported at the bottom. For rm-xed-eects we report the Hausman test for xed

versus random eects. For GMM we report tests for Under-identication and Weak Identication and the Hansen test for
overidentication. We also report tests against the null of the error term being uncorrelated with its p th lag for p = 1,
2, 3, failure of which can render the instruments utilizing p lagged values endogenous. Robust t-statistics are reported in
parentheses. */**/*** indicate signicance at the 10%/5%/1% level, respectively.
OLS
Experience of Independents
Experience of A liated
Board Size
Board Independence
Age of A liated
Age of Independents
Leverage
Firm Size
CapEx Over Sales
Collateral
Risk
Past ROA
FCF Over Assets
Num Segments
Firm Dummies
Industry Dummies
Year Dummies
N
R2
Hausman p-val
UnderID p-val
Weak Instruments Stat
Hansen p-val
Corr Order 1 p-val
Corr Order 2 p-val
Corr Order 3 p-val

(1)
0.011
(1.34)
0.005
(0.42)
-0.014
(-0.89)
-0.023**
(-2.01)
0.021**
(2.25)
-0.001
(-0.09)
-0.006
(-0.61)
-0.162***
(-9.90)
0.008
(0.55)
0.006
(0.37)
0.027**
(2.16)
0.021*
(1.80)
-0.011
(-0.78)
-0.067***
(-4.79)
Yes
Yes
6420
0.044

GMM

(2)
0.046*
(1.75)
0.010
(0.51)

(3)
0.048*
(1.83)
0.009
(0.43)
0.089**
(2.30)
0.044*
(1.71)
0.050**
(2.37)
0.013
(0.67)
0.008
(0.34)
-0.132*** -0.157***
(-2.98)
(-3.44)
-0.111*** -0.103**
(-2.66)
(-2.49)
0.035
0.028
(0.73)
(0.57)
0.020
0.028
(0.70)
(0.99)
-0.034
-0.032
(-1.18)
(-1.11)
-0.103*** -0.095***
(-4.04)
(-3.74)
-0.050*
-0.050*
(-1.77)
(-1.76)
Yes

Yes

Yes

Yes

6420
0.033

6420
0.036

0.000

0.000

(4)
0.159*
(1.88)
-0.159
(-1.43)
0.461**
(1.99)
0.493***
(3.01)
0.127**
(1.98)
0.187**
(2.21)
-0.051*
(-1.66)
-0.425***
(-4.65)
0.054
(0.98)
-0.041
(-1.00)
0.112**
(2.31)
0.130***
(2.86)
-0.001
(-0.02)
-0.158***
(-4.07)

(5)
0.272**
(2.10)
-0.184
(-1.00)
0.494
(1.14)
0.312
(1.29)
0.297***
(2.80)
0.077
(0.59)
-0.010
(-0.23)
-0.407***
(-2.70)
0.049
(0.74)
-0.018
(-0.36)
0.107
(1.52)
0.115*
(1.94)
-0.004
(-0.06)
-0.154***
(-2.74)

Yes
Yes

Yes
Yes

Yes
Yes

4533

3802

3103

0.000
6.722
0.457
0.045
0.425
0.065

55

0.001
2.041
0.473
0.043
0.196
0.307

(6)
0.411**
(2.27)
-0.751*
(-1.83)
0.398
(0.64)
0.710
(1.51)
0.316
(1.58)
0.099
(0.39)
-0.017
(-0.29)
-0.425**
(-2.03)
0.041
(0.44)
-0.046
(-0.65)
0.056
(0.61)
0.132
(1.55)
-0.020
(-0.22)
-0.182**
(-2.20)

0.076
1.080
0.920
0.051
0.099
0.095

Table 15: The Eect of Board Characteristics on Very Negative Income Restatements
The dependent variable is a dummy that equals 1 if Income Restatements (Compustat Item 123) is below the 5th percentile of
its distribution, which corresponds to a downwards restatement beyond 13 million dollars. The explanatory variables are: (1)
Industry Experience of A liated and Independent directors, a ratio in [0; 1] indicating the proportion with past experience
relevant to the rms business; (2) Age of A liated and Independent directors, which proxies for general experience; (3)
Board Size, i.e., number of directors; (4) Board Independence, the proportion of directors with no relationship with the rm;
(5) Leverage, i..e, Debt over Assets; (6) Firm Size, i.e., Log Market Capitalization; (7) Capital Expenditures Over Sales;
(8) Collateralizable Assets, measured as (Inventory plus Net PPE) Over Assets; (9) Risk, measured as the St.Dev. of daily
returns; (10) Past ROA, measured as 3-year average of EBITDA Over Assets; (11) Free Cash Flows Over Assets; (12) Number
of Business Segments. All board characteristics (Industry Experience and Age of directors, and Board Size and Independence)
are suspected to be endogenous. Specications (1)-(3) show OLS and (4)-(6) show GMM estimations. In GMM estimations
P
the instruments for zit take the form xit = zit k t 1 k ts=1k zis . In specications (4), (5), and (6) we use k = 1, 2, k = 2, 3,

and k = 3, 4, respectively. Diagnostic statistics are reported at the bottom. For rm-xed-eects we report the Hausman test
for xed versus random eects. For GMM we report tests for Under-identication and Weak Identication and the Hansen

test for overidentication. We also report tests against the null of the error term being uncorrelated with its p th lag for
p = 1, 2, 3, failure of which can render the instruments utilizing p lagged values endogenous. Robust t-statistics are reported
in parentheses. */**/*** indicate signicance at the 10%/5%/1% level, respectively.
OLS
Experience of Independents
Experience of A liated
Board Size
Board Independence
Age of A liated
Age of Independents
Leverage
Firm Size
CapEx Over Sales
Collateral
Risk
Past ROA
FCF Over Assets
Num Segments
Firm Dummies
Industry Dummies
Year Dummies
N
R2
Hausman p-val
UnderID p-val
Weak Instruments Stat
Hansen p-val
Corr Order 1 p-val
Corr Order 2 p-val
Corr Order 3 p-val

(1)
-0.001
(-0.32)
-0.001
(-0.52)
0.007**
(2.09)
0.004
(1.59)
-0.009***
(-3.84)
-0.000
(-0.20)
0.009***
(3.68)
0.041***
(13.09)
-0.009***
(-2.87)
0.003
(0.70)
0.002
(0.68)
0.001
(0.54)
-0.003
(-0.88)
0.020***
(6.84)
Yes
Yes
6420
0.066

(2)
-0.003
(-0.46)
-0.001
(-0.21)

0.014
(1.64)
0.014*
(1.81)
-0.006
(-0.53)
-0.003
(-0.45)
0.011*
(1.84)
0.011**
(2.24)
0.012**
(2.28)

GMM
(3)
-0.004
(-0.60)
-0.003
(-0.66)
-0.023***
(-3.29)
-0.007
(-1.35)
-0.017***
(-3.77)
0.002
(0.35)
-0.000
(-0.03)
0.021**
(2.39)
0.012
(1.54)
-0.003
(-0.31)
-0.005
(-0.82)
0.011*
(1.84)
0.009*
(1.83)
0.012**
(2.25)

Yes

Yes

Yes

Yes

6420
0.059

6420
0.064

0.000

0.000

(4)
-0.039**
(-2.07)
0.007
(0.32)
-0.094**
(-2.24)
-0.060**
(-2.02)
-0.037***
(-2.94)
-0.025
(-1.41)
0.018***
(2.92)
0.095***
(5.73)
-0.019*
(-1.94)
0.009
(1.05)
-0.026***
(-2.84)
-0.017**
(-2.09)
-0.018**
(-2.06)
0.031***
(4.30)

(5)
-0.081***
(-2.76)
0.016
(0.41)
-0.080
(-0.96)
-0.010
(-0.19)
-0.087***
(-3.88)
0.008
(0.29)
0.007
(0.83)
0.084***
(2.87)
-0.015
(-1.13)
0.002
(0.15)
-0.019
(-1.33)
-0.012
(-1.09)
-0.015
(-1.19)
0.027**
(2.50)

Yes
Yes

Yes
Yes

Yes
Yes

4533

3802

3103

0.000
6.722
0.033
0.000
0.166
0.154

56

0.001
2.041
0.179
0.000
0.024
0.308

(6)
-0.133***
(-2.98)
0.147
(1.61)
-0.128
(-1.00)
-0.076
(-0.73)
-0.131***
(-3.00)
0.049
(0.89)
0.010
(0.70)
0.106**
(2.42)
-0.010
(-0.49)
0.008
(0.50)
-0.019
(-0.97)
-0.017
(-0.96)
-0.015
(-0.76)
0.037**
(2.21)

0.076
1.080
0.952
0.000
0.041
0.343

Table 16: The Eect of Board Characteristics on the Return on Assets

The dependent variable is Return on Assets (ROA) dened as Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) in the current year, divided by the book value of assets in the previous year. The explanatory variables are: (1)
Industry Experience of A liated and Independent directors, a ratio in [0; 1] indicating the proportion with past experience
relevant to the rms business; (2) Age of A liated and Independent directors, which proxies for general experience; (3)
Board Size, i.e., number of directors; (4) Board Independence, the proportion of directors with no relationship with the rm;
(5) Leverage, i..e, Debt over Assets; (6) Firm Size, i.e., Log Market Capitalization; (7) Capital Expenditures Over Sales;
(8) Collateralizable Assets, measured as (Inventory plus Net PPE) Over Assets; (9) Risk, measured as the St.Dev. of daily
returns; (10) Number of Business Segments. All board characteristics (Industry Experience and Age of directors, and Board
Size and Independence) are suspected to be endogenous. Specications (1)-(3) show OLS and (4)-(6) show GMM estimations.
P
In GMM estimations the instruments for zit take the form xit = zit k t 1 k ts=1k zis . In specications (4), (5), and (6) we use
k = 1, 2, k = 2, 3, and k = 3, 4, respectively. Diagnostic statistics are reported at the bottom. For rm-xed-eects we report
the Hausman test for xed versus random eects. For GMM we report tests for Under-identication and Weak Identication
and the Hansen test for overidentication. We also report tests against the null of the error term being uncorrelated with its
p th lag for p = 1, 2, 3, failure of which can render the instruments utilizing p lagged values endogenous. Robust t-statistics
are reported in parentheses. */**/*** indicate signicance at the 10%/5%/1% level, respectively.
OLS
Experience of Independents
Experience of A liated
Board Size
Board Independence
Age of A liated
Age of Independents
Leverage
Firm Size
CapEx Over Sales
Collateral
Risk
Num Segments
Firm Dummies
Industry Dummies
Year Dummies
N
R2
Hausman p-val
UnderID p-val
Weak Instruments Stat
Hansen p-val
Corr Order 1 p-val
Corr Order 2 p-val
Corr Order 3 p-val

(1)
0.009
(1.23)
0.010
(1.32)
-0.028***
(-3.34)
-0.028***
(-3.50)
-0.035***
(-5.04)
-0.023***
(-3.14)
-0.054***
(-6.42)
0.053***
(6.58)
0.244***
(15.86)
0.149***
(12.58)
-0.016
(-1.33)
-0.053***
(-8.05)
Yes
Yes
6420
0.575

GMM

(2)
0.023
(1.25)
0.017*
(1.88)

(3)
0.021
(1.16)
0.012
(1.14)
0.011
(0.66)
-0.008
(-0.57)
-0.031***
(-2.90)
-0.024*
(-1.86)
-0.088***
(-4.66)
0.081*** 0.067**
(3.16)
(2.54)
0.261*** 0.259***
(8.03)
(8.02)
0.316*** 0.305***
(9.92)
(9.57)
-0.032*
-0.030
(-1.66)
(-1.59)
-0.019*
-0.012
(-1.72)
(-1.02)
Yes

Yes

Yes

Yes

6420
0.379

6420
0.384

0.000

0.000

(4)
0.052
(1.37)
0.037
(0.90)
0.101
(1.22)
-0.040
(-0.66)
0.000
(0.02)
0.047
(1.34)
-0.041***
(-2.67)
0.019
(0.58)
0.306***
(10.53)
0.130***
(7.35)
-0.000
(-0.01)
-0.028**
(-2.14)

(5)
0.060
(1.20)
0.078
(1.11)
-0.004
(-0.03)
-0.107
(-1.12)
0.005
(0.13)
0.044
(0.86)
-0.017
(-0.89)
0.073
(1.43)
0.290***
(9.08)
0.151***
(7.00)
-0.017
(-0.57)
-0.016
(-0.83)

Yes
Yes

Yes
Yes

Yes
Yes

4533

3802

3103

0.000
6.722
0.463
0.999
0.302
0.364

57

0.001
2.041
0.439
0.331
0.128
0.843

(6)
0.022
(0.38)
0.136
(1.07)
0.085
(0.46)
-0.137
(-0.90)
-0.071
(-1.10)
0.101
(1.37)
-0.026
(-1.18)
0.038
(0.58)
0.313***
(8.48)
0.135***
(5.30)
-0.019
(-0.58)
-0.022
(-0.85)

0.076
1.080
0.329
0.162
0.001
0.448

Figure 1: OLS versus Quantile Regression Estimates

For each dependent variable in our analysis, we plot xed-eects quantile regression estimates and condence intervals
for the eect of the experience of independent directors, together with the corresponding least squares estimates and
condence intervals. The point estimates represent the impact in units of standard deviation of a one-standarddevation change in board experience on each of the dependent variables, holding other dependent variables xed. Thus,
each of the plots has a horizontal quantile scale, and a vertical scale in terms of standard deviations of the particular
dependent variable. The solid blue line represents the eect of independent directorsexperience on the conditional linear
quantile estimate, for each of the quantiles from 0.05 to 0.95. The shaded green area depicts a 90 percent pointwise
condence band for the quantile regression estimates. The thick red dashed line in each gure shows the ordinary least
squares estimate of the conditional mean eect. The two thin red dotted lines represent 90 percent condence intervals
for the least squares estimate.

58