Providing Exactly What You Need: The Value of Outside CEO Directors on Firm Strategic Change

Abstract

A company’s board of directors often includes CEOs from other firms serving as independent directors, hereby called outside CEO directors. This study examines whether these outside CEO directors, as compared to other directors, have unique effect on firm strategic changes. Drawing on the resource dependency theory, social categorization theory and psychology literature, we argue outside CEO directors bring more desired resource to the focal firm and thus positively affect its strategic changes. We also propose that achieving the full potential of these unique resources hinges on the mutual understanding between the focal firm’s CEO and outside CEO directors. We expect the language style similarity, professional experience similarity and demographic similarity to strengthen the mutual understanding process. These hypotheses are tested with data from a sample of S&P 1500 firms with 4,300 observations from year 2005 to 2018.