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Do academics in the boardroom create value for firms?


Objective: The objective of this article is to examine the value of academics as board members. Using upper echelons theory to explain how top management’s characteristics affect corporate decision-making, we particularly investigated whether academics as independent directors contribute to firm performance. More specifically, we further assessed whether this enhancing value for the firm remains in the long run. Moreover, this study also examined the monitoring role of academics as independent directors in reducing investment inefficiency.

Research Design & Methods: This study used Indonesian non-financial listed firms covering the years 2007 through 2016 as our sample. We collect both financial and non-financial data from Indonesian Stock Exchange and firms’ annual reports. We eliminated firm-year observations where information is missing and left an unbalanced panel consisting of 2461 firm-year observations. To test our hypothesis empirically, we initially used OLS regression as well as GLS random effects and several robustness tests to mitigate any endogeneity concern, such as propensity score matching and Hainmueller entropy balancing. Furthermore, we used quantile regression to examine the relation effect of academic boards across the entire distribution of investment inefficiency and also to mitigate the censoring problem.

Findings: Empirically, we showed that firms with academics in board members, on average, have better firm performance. The results hold to a battery of robustness checks. The analysis also suggests that the enhancing values of academic board members remain in the long run. Interestingly, we further found that the enhancing value of academics is more pronounced in reducing high-level of investment inefficiency.

Implications & Recommendations: Corporate governance literature offers upper echelons theory to explain how the top management’s characteristics affect corporate decision-making. Similar to various demographic characteristics, this study confirmed the upper echelons theory in exposing the advising and monitoring role of academic independent directors. Personal characteristics of board members predict the outcome of corporate decision-making, even in emerging countries such as Indonesia.

Contribution & Value Added: This study shed light on the important role of academics as independent board members in delivering value for firms. Examining this issue in an emerging country such as Indonesia, where the corporate governance mechanism is more likely to be a rubber stamp, helps us highlight the actual value of hiring independent academic directors. Our evidence also contributes to the literature on the channel in which academics deliver value for firms by reducing investment inefficiency at the extreme level.



academic board, upper-echelon, firm performance, investment efficiency

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