Do academics in the boardroom create value for firms?


Abstract

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.

       

Keywords

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

Abu-Tapanjeh, A.M. (2009). Corporate governance from the Islamic perspective: A comparative analysis with OECD principles. Critical Perspectives on Accounting, 20(5), 556-567. https://doi.org/10.1016/j.cpa.2007.12.004

Adelino, M., & Dinc, S.I. (2014). Corporate distress and lobbying: Evidence from the Stimulus Act. Journal of Financial Economics, 114(2), 256-272. https://doi.org/10.1016/j.jfineco.2014.07.004

Aǧca, Ş., & Mozumdar, A. (2008). The impact of capital market imperfections on investment-cash flow sensi-tivity. Journal of Banking and Finance, 32(2), 207-216. https://doi.org/10.1016/j.jbankfin.2007.02.013

Altman, E.I., Iwanicz-Drozdowska, M., Laitinen, E.K., & Suvas, A. (2017). Financial Distress Prediction in an International Context: A Review and Empirical Analysis of Altman’s Z-Score Model. Journal of Interna-tional Financial Management and Accounting, 28(2), 131-171. https://doi.org/10.1111/jifm.12053

Arifin, T., Hasan, I., & Kabir, R. (2020). Transactional and relational approaches to political connections and the cost of debt. Journal of Corporate Finance, 101768. https://doi.org/10.1016/j.jcorpfin.2020.101768

Bertrand, M., Kramarz, F., Schoar, A., & Thesmar, D. (2018). The Cost of Political Connections. Review of Finance, 22(3), 849-876. https://doi.org/10.1093/rof/rfy008

Biddle, G.C., Hilary, G., & Verdi, R.S. (2009). How does financial reporting quality relate to investment effi-ciency?. Journal of Accounting and Economics, 48(2-3), 112-131. https://doi.org/10.1016/j.jacceco.2009.09.001

Chandra, S., & Kammen, D. (2002). Generating reforms and reforming generations: military politics in Indo-nesia’s democratic transition and consolidation. World Politics, 55(1), 96-136. https://www.jstor.org/stable/25054211

Chen, J., Garel, A., & Tourani-Rad, A. (2019). The value of academics: Evidence from academic independent director resignations in China. Journal of Corporate Finance, 58, 393-414. https://doi.org/10.1016/j.jcorpfin.2019.06.003

Dou, C., Yang, X., Liu, W., & Sun, R. (2022). Can independent directors with macro vision relieve debt de-fault–from the perspective of independent director’s ‘advisory’ function. China Journal of Accounting Studies, 10(1), 73-94. https://doi.org/10.1080/21697213.2022.2082721

Dwyera, S., Richard, O., & Chadwick, K. (2003). Gender diversity in management and firm performance: The influence of growth orientation and organizational culture. Journal of Business Research, 56, 1009-1019. https://doi.org/10.1016/S0148-2963(01)00329-0

Dyreng, S.D., Hanlon, M., & Maydew, E.L. (2010). The effects of executives on corporate tax avoidance. The Accounting Review, 85, 1163-1189. https://www.jstor.org/stable/20744155

Francis, B., Hasan, I., & Wu, Q. (2015). Professors in the boardroom and their impact on corporate govern-ance and firm performance. Financial Management, 44(3), 547-581. https://doi.org/10.1111/fima.12069

Habib, A., Muhammadi, A.H., & Jiang, H. (2017). Political connections, related party transactions, and audi-tor choice: Evidence from Indonesia. Journal of Contemporary Accounting and Economics, 13(1), 1-19. https://doi.org/10.1016/j.jcae.2017.01.004

Hainmueller, J. (2012). Entropy balancing for causal effects: A multivariate reweighting method to produce balanced samples in observational studies. Political Analysis, 20(1), 25-46. https://doi.org/10.1093/pan/mpr025

Hambrick, D., & Mason, P. (1984). Upper Echelons: The Organization as a Reflection of Its Top Managers. The Academy of Management Review, 9(2), 193-206. https://doi.org/10.2307/258434

Ho, K.C., Li, H.M., & Gong, Y. (2022). How does corporate social performance affect investment inefficiency? An empirical study of China market. Borsa Istanbul Review, 23(2), 515-524. https://doi.org/10.1016/j.bir.2021.06.016

Holzhacker, R.L., Wittek, R., & Woltjer, J. (2015). Decentralization and Governance for Sustainable Society in Indonesia. Decentralization and Governance in Indonesia. https://doi.org/10.1007/978-3-319-22434-3_1

Jalal, A.M., & Prezas, A.P. (2012). Outsider CEO succession and firm performance. Journal of Economics and Business, 64(6), 399-426. https://doi.org/10.1016/j.jeconbus.2012.09.001

Jiang, B., & Murphy, P.J. (2007). Do business school professors make good executive managers?. Academy of Management Perspectives, 21(3), 29-50. https://doi.org/10.5465/amp.2007.26421237

Jin, H., Su, Z., Wang, L., & Xiao, Z. (2022). Do academic independent directors matter? Evidence from stock price crash risk. Journal of Business Research, 144(1), 1129-1148. https://doi.org/10.1016/j.jbusres.2022.02.054

Khan, W.A., & Vieito, J.P. (2013). CEO gender and firm performance. Journal of Economics and Business, 67, 55-66. https://doi.org/10.1016/j.jeconbus.2013.01.003

Olsen, K.J., & Stekelberg, J.M. (2015). CEO Narcissism and Corporate Tax Sheltering. Journal of American Tax-ation Association, 38(1), 1-42. https://doi.org/10.2308/atax-51295

Schein, E.H. (2004). Organizational Culture and Leadership (The Jossey-Bass Business & Management Series) Third Edition. Jossey-Bass A Wiley Imprint: San Francisco, CA.

Wang, A. (2020). Professors on boards and corporate innovation in China. Applied Economics, 52(41), 4474-4498. https://doi.org/10.1080/00036846.2020.1735623


Published : 2023-06-30


ArifinT., AchsantaA., & TrinugrohoI. (2023). Do academics in the boardroom create value for firms?. Entrepreneurial Business and Economics Review, 11(2), 157-170. https://doi.org/10.15678/EBER.2023.110208

Taufiq Arifin  taufiqar@staff.uns.ac.id
Universitas Sebelas Maret  Indonesia
http://orcid.org/0000-0002-5015-0002
Aldy Fariz Achsanta 
http://orcid.org/0000-0002-1390-8304
Irwan Trinugroho 
http://orcid.org/0000-0003-4911-7982




Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

Authors who publish with this journal agree to the following terms:

  1. Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a CC BY-4.0 licence that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
  2. Authors are asked to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.

 Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) only the final version of the article, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access). We advise using any of the following research society portals: