Director foreign experience: Geographic specificity and value implication

Abstract

This paper introduces the concept of geographic specificity to director foreignness. We argue that the geographic location of a director’s foreign experience affects her board appointment by multinational firms and her subsequent contribution to firm value. We test our hypotheses using a sample of U.S. multinational firms with detailed firm foreign subsidiary data collected from Exhibit 21 files and director foreign work experience data from BoardEx. The regression results show that firms with more foreign subsidiaries in a particular region tend to hire more independent directors with foreign work experience from that region. Furthermore, foreign-experienced directors contribute to increased firm performance in terms of ROA and Tobin’s Q, but only when their foreign experience is geographically matched with their firm’s foreign operations. The contribution is even more pronounced, when the institutional distance between the foreign host country and the home country is long. We also find that foreign-experienced directors are more likely to sit on advisory committees than monitoring committees, indicating their heavier contribution through advisory roles. Lastly, we conduct a difference-in-difference analysis using director exogenous departures to address potential endogeneity concerns. Overall, our paper suggests that geographic factors play an important role in the selection and contribution of foreign directors, and sheds new light on the previous mixed evidence on value implication of foreign directors.