Professors in the Boardroom and their impact on corporate governance and firm performance

7/27/2019 Professors in the Boardroom and their impact on corporate governance and firm performance

1/52Electronic copy available at: http://ssrn.com/abstract=2226411

Professors in the Boardroom and their impact on

corporate governance and firm performance

Bill Francis,a

Iftekhar Hasan,b c

Qiang Wua *

aLally School of Management and Technology, Rensselaer Polytechnic Institute, Troy, NY 12180, USAb Schools of Business, Fordham University, New York, NY 10019, USA

cBank of Finland, FI 00101, Helsinki, Finland

Abstract

Directors from academia served on the boards of more than one third of S&P

1,500 firms over the 19982006 period. This paper investigates the effects of academic

directors on corporate governance and firm performance. We find that companies withdirectors from academia are associated with higher performance. In addition, we find thatprofessors without administrative jobs drive the positive relation between academic

directors and firm performance. We also show that professors educational backgrounds

affect the identified relationship. For example, academic directors with business-relateddegrees have the most positive impacts on firm performance among all the academic

fields considered in our regressions. Furthermore, we show that academic directors play

an important governance role through their monitoring and advising functions.

Specifically, we find that the presence of academic directors is associated with higheracquisition performance, higher number of patents, higher stock price informativeness,

lower discretionary accruals, lower CEO compensation, and higher CEO turnover-

performance sensitivity. Overall, our results provide supportive evidence that academicdirectors are effective monitors and valuable advisors, and that firms benefit from

academic directors.

JEL Classification: G30; G34; M41Keywords: Academic directors; Firm performance; Monitoring; Advising

Previous version of this paper was titled Professors in the Boardroom: Is There an Added Value for

Academic Directors? We thank the following for their helpful comments: Ye Cai, Ashok Robin, Hao

Zhang, Stan Hoi, and workshop participants at Rensselaer Polytechnic Institute, Rochester Institute of

Technology, Fordham University, Copenhagen Business School, Bank of Finland, 2011 Financial

Management Association Annual Meeting, and 2011 Tor Vergata Conference in Rome, Italy.

* Corresponding author. Telephone: +1 518 276 3338. Fax: + 1 518 276 8661. Email: [email protected]
mailto:[email protected]:[email protected]


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as compared to many other outside directors, and therefore can be more independent.

Fama (1980) and Fama and Jensen (1983) argue that outside directors have incentives to

monitor management because they want to protect their reputation as effective,

independent decision makers. Thus, the monitoring theory indicates that academic

directors would be important monitors of management.

Second, professors are specialized experts in their research fields, including

business, technology, and law. Audretsch and Lehmann (2006) argue that directors with

academic backgrounds can enhance the competitive advantage of firms by facilitating

access to and absorption of external knowledge spillover. In most announcements of

appointing professors as non-executive directors, CEOs and chairmen often note that a

professors academic expertise will be of great benefit to the company.3

Adams and

Ferreira (2007) point out that outside directors spend most of their time advising rather

than monitoring management. More recent literature has begun to emphasize the

importance of the advising role, not merely the monitoring role that outside directors play

(Adams and Ferreira, 2007; Coles, Daniel, and Naveen, 2008; Brickley and Zimmerman,

2010).4

Thus, the expertise theory indicates that academic directors can be valuable

advisors who bring unique expertise into the boardroom.

Third, academic directors primary areas of expertise are academic in nature.

They tend to think through problems differently than nonacademics and can provide

different perspectives in the boardroom, which adds to the board's diversity. Prior studies

find that board diversity (such as occupational diversity, social diversity, gender diversity,

3 An article inDirectors and Boards (January 1, 1997) points out that U.S. companies recruit directors from

academia to benefit from their special expertise and to enrich board diversity.4 In their survey, Demb and Neubauer (1992) find that setting the strategic direction of the company is

one of the board's most important jobs.


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and ethnic diversity) is an important factor that influences board efficacy and firm

performance (Carter, Betty, and Simpson, 2003; Adams and Ferreira, 2009; Anderson,

Reeb, Upadhyay, and Zhao, 2011; Gul, Srinidhi, and Ng, 2011). Forbes and Milliken

(1999) argue that job-related diversity, including the presence of academics on boards,

could enhance the functional area knowledge and skill on the board. Thus, the diversity

theory also predicts that academic directors increase board diversity and improve board

efficacy.

Nonetheless, one may argue that certain aspects of professors academic

characteristics may not be helpful for board effectiveness. For example, academia

emphasizes scholarly rigor and accurate results, which might clash with the goal of

optimal firm performance. Professors specialized expertise is often unrelated to the

operations of actual businesses. The narrow business exposure of professors may limit

their competence when making decisions in the real world of uncertain business

environments. Furthermore, some academic directors hold administrative positions and

thus may have connections to companies through university endowments or other

fundraising relationships, which may make them less independent than inside managers.

From these perspectives, academic directors might not be effective monitors or valuable

advisors.

Examining the role of academic directors is also relevant because U.S.

corporations commonly elect professors to their boards. For instance, during the 1998

2006 period, over one third of S&P 1,500 firms had at least one professor in their

boardrooms. Boards with academic directors on average have about 19% of their outside

directors drawn from academia. Our investigations focuses on the following questions:


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What kinds of companies are more likely to appoint academic directors? What are the

differences between academic directors and other outside directors? Are academic

directors effective monitors and valuable advisors? How do academic directors affect

firm performance? How do academic directors backgrounds affect their effectiveness?

We examine these questions empirically. Using S&P 1,500 firms during the

period 19982006, we first examine the appointments of academic directors in the

boardroom. We find that prior firm performance has no significant impact on the choice

of academic directors, and that small firms and research-intensive firms are more likely to

hire academic directors. In addition, we find that geographical distance between

corporations and universities affects the choice of academic directors. Furthermore, larger

boards and CEOs with more shareholdings are less likely to choose directors from

academia. Lastly, the demand for academic directors varies greatly across industries.

While high-tech companies and financial companies are more likely to appoint academic

directors, certain manufacturing and wholesale and retail companies are less likely to

choose academic directors.

Next, we investigate the association between academic directors and firm

performance. In line with our hypothesis, we find that both the presence and the relative

size of academic directors on the board are associated with a higher firm performance as

measured by industry-adjusted Tobins Q after controlling for other governance

characteristics, firm characteristics, and ownership structures. The results are robust when

we use Tobins Q, industry-adjusted ROA, ROA as alternative measures of firm

performance, use a two-stage least squares regression to control for the potential

endogeneity of academic directors, use a Fama and MacBeth regression to control for


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cross-sectional correlation, and use a median regression to deal with outlier effect. The

long-run event study results further confirm the positive impact of academic directors on

firm performance.

To further mitigate the endogeneity concerns, we focus on firms with academic

directors and compare firm performance before and after the appointment of the first

academic director. We construct a matching sample with nonacademic director

appointments and then apply a difference-in-difference method to isolate academic

director effect on firm performance. Our results further confirm the positive impact of

academic directors on firm performance and suggest that academic directors bring about,

and not merely reflect, an improved firm performance.

Having established a significant relation between academic directors and firm

performance, we further explore possible channels through which academic directors

affect firm performance. We first turn our attention to the monitoring effectiveness of

academic directors. Following Adams and Ferreira (2009), Masulis, Wang and Xie (2012)

and others, we compare governance characteristics between academic directors and

nonacademic outside directors. We find that academic directors are more likely to attend

board meetings than other outside directors. In addition, academic directors hold more

outstanding committee memberships than other outside directors. Specifically, academic

directors are more likely to sit on monitoring-related committees, such as auditing

committees and corporate governance committees, than nonacademic outside directors.

The results on the director attendance behavior and committee assignments indicate that

academic directors are better at board governance than other outside directors.


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We then examine the impact of academic directors on a firms CEO compensation

policy and CEO turnover, two decisions that are directly under the purview of corporate

boards. Our analysis shows that firms with academic directors on boards are associated

with significantly lower cash-based CEO compensation, but not equity-based CEO

compensation. In addition, we find that CEO turnover is more sensitive to firm

performance when academic directors are present. The results indicate that academic

directors strengthen the management oversight by boards.

In further analyses, we investigate the impact of academic directors on financial

reporting quality. We find that firms with academic directors are less likely to manage

earnings through discretionary accruals and to be subject of SEC investigations, as

evidenced by Accounting and Auditing Enforcement Releases (AAERs) against top

executives. We also find that stock prices of firms with academic directors reflect more

firm-specific information. The results further confirm the monitoring role of academic

directors.

We examine the advising role of academic directors as well. As innovation is

crucial for the development and performance of the firm, we examine whether firms with

academic directors are more innovative than firms without academic directors. Our

results show that the presence of academic directors is significantly and positively related

to the number of patents, indicating that academic directors enhance firms innovation

capacity through their specialized expertise. In addition, we examine whether academic

directors affect firms acquisition decisions. We find that the presence of academic

directors is significantly and positively related to acquisition performance, suggesting


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academic directors play important advising and monitoring roles during acquisition

decisions.

Finally, we explore how professors occupational and educational backgrounds

affect the relation between academic directors and firm performance. We first partition

academic directors into two groups: those without administrative positions, and those

with certain administrative jobs, such as presidents and deans. We find that professors

without administrative positions mainly drive the positive association between academic

directors and firm performance. We further provide some evidence that professors with

administrative jobs are less likely to attend board meetings, even after controlling for

other director characteristics, such as directorships and gender. In a further test, we find

that the association between academic directors and firm performance appears to vary

with professors educational backgrounds as well. Specifically, of all the areas of study

considered in our regressions, academic directors with business-related degrees have the

most positive impacts on firm performance, followed by academic directors with science

and engineering and political backgrounds.

Prior research on the role of academic directors is very limited. A few papers use

academic directors as a control variable in the studies of other board characteristics. For

example, Fich and Shivdasani (2006) find that academicians are less likely to be

appointed as busy outside directors. Anderson, Mansi, and Reeb (2004) find that the

presence of academic directors is associated with lower cost of debt. Guner, Malmendier,

and Tate (2008) include business professors as one type of financial expertise in their

study and find that business professors reduce the investment-cash flow sensitivity for

financing unconstrained firms. They also find that business professors are associated with


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lower costs of public debt borrowing. However, in short-run event studies, Shivdasani

and Yermack (1999) and Fich (2005) do not find that there are significantly different

market reactions between appointments of academic directors and other outside directors.

Our paper is the first to focus solely on academic directors and comprehensively

examine the governance role played by them and their impact on firm performance. We

conduct an array of robustness checks to deal with endogeneity and other econometric

issues which are common concerns in the board of director literature (Hermalin and

Weisbach, 2003). In addition, we explore the underlying channels, such as CEO

compensation, CEO turnover, financial reporting quality, innovation, and acquisition,

through which academic directors could affect firm performance. Lastly, we investigate

how the occupational and educational backgrounds of academic directors affect their

effectiveness.

This study complements the board-independence literature by showing that

enhancing board efficacy takes more than just independence. The apparent positive

relation between academic directors and firm performance supports more recent

theoretical work, such as Adams and Ferreira (2007), which emphasizes that both the

monitoring and advising functions of directors are important for board efficacy and firm

performance. Our results are also consistent with Fich (2005), Fich and Shivdasani

(2006), and others who argue that outside directors are not homogenous, and that some

kinds of outside directors are better than others.

The remainder of the paper is organized as follows. Section 2 describes the

sample selection and summary statistics. Section 3 reports the results on the determinants

of appointing professors on boards. Section 4 provides empirical results on the relation


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between academic directors and firm performance. Section 5 explores the monitoring and

advising roles of academic directors. Additional tests on the impact of academic directors

backgrounds on efficacy are provided in Section 6. Section 7 concludes.

2. The data

2.1. Sample

The sample begins with all firms in the Investor Responsibility Research Center

(IRRC) director database, which covers S&P 500, S&P MidCap 400, and S&P SmallCap

600 for the 19982006 proxy seasons. Since 1998, IRRC has recorded each directors

primary employer and primary title, which is how this study detects academic directors.

We use keyword searches for directors from academia in the IRRC (e.g., university,

college, institute, school, and academy). In order to confirm that the selected directors

from academia are professors, and to find occupational and educational information for

each academic director, we manually collect each directors background information,

including his or her affiliation, degree, area of study, and title by searching his or her

personal website, school website, or other business websites.5

The final academic

director-year sample includes 6,742 observations for 1,379 unique academic directors.

Table 1 reports the distribution of academic directors by year, title, and area of

study. Panel A shows that the total number of academic directors over time is relatively

stable. The number of academic directors is between 700 and 800 for all years except

1999 (in which there are 867 academic directors) and 2002 (in which there are 638

academic directors). The sample does not show an increase in the number of academic

directors (or business-related professors) after the implementation of the Sarbanes-Oxley

5 In the IRRC data, the majority ofdirectors title information is missing.


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Act (SOX), which requires financial experts on boards. Panel B of Table 1 shows that

among 6,742 academic directors, 4,074 also hold certain administrative titles such as

president, dean, chancellor, and department chair. Presidents and deans account for 1,864

(28%) and 1,007 (15%) directorships, respectively. Based on this sample, professors with

certain administrative positions are clearly more likely to be chosen as board directors.

As shown in Panel C, over 38% of academic directors are in the business-related fields,

including finance, accounting, economics, and other business majors, followed by

engineering and science (16.37%), medical (15%), and political science (10%). The

results show that professors with business-related backgrounds are more likely to sit in

the boardroom.

[Insert Table 1 here]

As our main analysis is at firm-year level, we convert the IRRC director-year

information into board (firm)-year information. Then we merge this information with

other data sources. Data about other board information and G-index are also from the

IRRC.6

Financial data are from Compustat. Data about insider ownership are from

ExecuComp. After merging the data and deleting observations with missing information,

we have 9,498 firm-year observations for 2,115 unique firms for the 1998-2006 sample

period.

2.2 Measures of academic directors and firm performance

6 Because IRRC does not provide G-index information annually, following Bebchuk and Cohen (2005), we

fill in missing years by assuming that the governance provisions reported in any given year were also in

place in the year preceding the volumes publication.


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To capture the presence of professors in the boardroom, we create a dummy

variable, Academic, that equals one if a firm has at least one academic director in its

boardroom, and zero otherwise. We also construct a continuous variable, Academic Ratio,

which equals the number of academic directors divided by total number of directors, to

capture the relative size of academic directors on the board.

In our paper, we use a market-based measure, Tobins Q, as our proxy for firm

performance. The Q regression is widely used in corporate board literature (Yermack,

1996; Ferris, Jagannathan, and Pritchard, 2003; Devos, Prevost, and Puthenpurackal,

2009; Masulis, Wang and Xie, 2012). Tobins Q is the ratio of a firms market value to its

book value. The firms market value equals the book value of assets minus the book

value of equity plus the market value of equity. Because of the relative importance of

industry-specific factors for firm performancefollowing Gompers, Ishii, and Metrick

(2003), Bebchuk, Cohen, and Ferrell (2009), and othersin our analysis we use industry-

adjusted Tobins Q, which is a firms Q minus the median Q in the firms industry in the

observation year. We define a firms industry by the firms two-digit primary SIC code.

Because measurement error is correlated within industries to some degree, using

industry-adjusted Tobins Q could also help mitigate measurement error associated with

Tobins Q. Nonetheless, in robustness checks, we find that our results also hold when we

use Tobins Q as the dependent variable.

However, Tobins Q is also often used as a measure of growth opportunities.

Although we try to address this measurement error issue by using a number of controls

for investment opportunities, we are still concerned about the possible impact that growth

opportunities have on our coefficient estimates. Therefore, we supplement the Q tests


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with similar models using an accounting measure of operating performance. Since the

historical accounting measure of performance does not employ market prices, this

measure is unlikely to reflect the value of future investment opportunities.

We use ROA as the accounting measure of firm performance. ROA is the ratio of

net income before extraordinary items and discontinued operations to its book value of

assets.7

Similar to industry-adjusted Tobins Q, we use industry-adjusted ROA, which is

a ROA minus the median ROA in the firms industry in the observation year. We also

define a firms industry by the firms two digit primary SIC code.

2.3. Summary statistics

Table 2 shows the summary statistics, which are based on all 9,498 firm-year

observations. The mean (median) value of Q is 1.99 (1.51) while the mean (median)

value of ROA is 0.13 (0.13). The mean (median) value of industry-adjusted Q is 0.68

(0.22) while the mean (median) value of industry-adjusted ROA is 0.07 (0.06).8

Both Q

and ROA vary across our sample. The results are similar to Adams and Ferreira (2008),

Devos, Prevost, and Puthenpurackal (2009), and Masulis, Wang and Xie (2012).

We find during 1998 to 2006, 36% of the firm-year observations have at least one

academic director. For firms with academic directors, 77% of firms have one academic

director, 19% of firms have two academic directors, and 4% of firms have more than two

academic directors. The relative size of academic directors is not very large for the full

sample. The average ratio of academic directors to board size is 5%. However, we find

that relative size of academic directors is considerably large within firms who have

7 We also use an operating cash flow measure for ROA and the results are qualitatively unchanged.8To alleviate the influence of outlier, both Tobins Q and ROA are censored at the 1st and 99th percentiles.


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performance because it could help us find determinants of academic directors for

endogeneity correction in the IV regression.

We include four sets of test variables in our probit regressions. Firm specific

characteristics may influence the decision to choose directors from academia. Thus, the

first set of test variables is firm characteristics. We first include one to three lags of Q in

the regression to test whether prior firm performance affects the appointments of

academic directors on the board. Controlling for prior performance is important because

we can examine the reversed causality problem in our main analysis in the next section.

Firms with more intense research and development efforts may have higher demand for

academic directors' specific expertise. Thus we include R&D, which is total R&D

expenditures divided by total assets. We also includeLog (Asset), which is the natural log

of total firm assets, to control for firm-size effect. Both R&D and Log (Asset) are

measured with a one-year lag to Academic. Lastly, we include a dummy variable,

Distance, which equals one if the geographical distance between the firm and the

academic director university is less than 100 miles, and zero otherwise.9 We expect that

firms are more likely to choose professors from nearby universities.

Boards of directors have the ultimate responsibility to appoint board members.

Therefore, we include several board characteristics which are widely studied in the

literature. Independence is the percentage of outside directors (excluding academic

directors) on the board. Log (Size) is the natural log of the total number of directors on

the board.Duality is a dummy variable that equals one if the CEO is also the chairman; it

equals zero otherwise. Woman is a dummy variable that equals one if at least one director

is female; it equals zero otherwise. Log (Age) is the natural log of the directors' average

9 If there is more than one academic director on the board, we use the average distance.


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age. Log (Tenure) is the natural log of the directors' average tenure. Directorship is the

average number of directorships directors hold.

Board ownership and management ownership may affect firms incentive to

choose professors as board members. We also include these ownership variables in our

regression. Director Ownership is the board's ownership as a percentage of all shares

outstanding.Insider Ownership is management's ownership as a percentage of all shares

outstanding.

Finally, we control for industry effect in the regression, as different industries

may have different demands for directors from academia. We use one-digit SIC codes to

separate firms into eight industries to test the industry effect.10


The results of our probit regressions are in Table 3. The dependent variable is

Academic Director Appointment, which is a dummy variable that equals one if a firm

appoints at least one academic director in a certain year, and zero if a nonacademic

outside director is appointed in a certain year. In Column 1, we include firm variables and

control for industry effect. We find that none of Q (t-1), Q (t-2), and Q (t-3) has a

significant coefficient, suggesting that prior performance does not appear to affect the

possibility of having an academic director on the board.11

We also find that firm size has

a significant negative effect on the presence of academic directors, but R&D expenditures

have a significant positive effect. The results indicate that smaller firms and research-

10 Our results hold when we use two-digit SIC codes to define industries.11As a robustness check, we also use alternative measures of a firms past performance, including industry -

adjusted Tobins Q, ROA, and industry-adjusted ROA. None of these measures has a significant coefficient.


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intensive firms are more likely to choose professors for their boards. Consistent with our

expectation, we findDistance also impacts the possibility of choosing academic directors

positively, suggesting that firms are more likely to choose professors from nearby

universities.

With regards to the industry effect, we find that the demand for academic

directors varies among different industries. For example, although the financial services,

transportation, and communications industries are more likely to choose professors for

their boards, some manufacturing and wholesale and retail firms are less likely to do so.

The results seem consistent with the expertise theory that financial and high-tech firms

are more likely to seek academic directors for their specialized expertise.

In Column 2, we also include board variables in the regression. The coefficient of

Log (Size) is negative and significant at the traditional level, indicating that larger boards

are less likely to appoint directors from academia. We also find that coefficient of

Directorship is significantly positive, indicating that directors with more outside

directorships are more likely to choose academic directors.

In Column 3, we include two ownership variables simultaneously. We find that

Director Ownership has no impact on the possibility of appointing academic directors,

while Insider Ownership is negative and significant at the traditional level, suggesting

that if a firm's manager holds more shares, professors are less likely to be appointed on

the board.

4. Academic directors and firm performance

4.1. The association between academic directors and firm performance


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In this section, we examine the relation between academic directors and firm

performance. As we discussed before, we use industry-adjusted Q to measure firm

performance. We use Academic and Academic Ratio to capture the presence and the

relative size of academic directors on the board. Following prior studies, such as

Gompers, Ishii, and Metrick (2003), Bebchuk and Cohen (2005), and Devos, Prevost, and

Puthenpurackal (2009), we control for board, governance, and firm characteristics that

may affect Q in our regressions. For board characteristics, we include Independence,Log

(Size), Duality, and Director Ownership as described. We also control for Insider

Ownership in the regressions (Jensen and Meckling, 1976; Yermack, 1996). To account

for the potential nonlinearity between firm value and insiders ownership (Morck, Shleifer,

and Vishny, 1988; McConnell and Servaes, 1990), we include a quadratic term ofInsider

Ownership. We use the Gompers, Ishii, and Metrick (2003) governance index, G-index,

as a proxy for the strength of firms other governance mechanisms.

For firm characteristics, we include Log (Asset) and R&D as defined earlier. We

also include the following firm variables. Leverage is the book value of debt over total

assets. Cash is cash and short-term investments over total assets. Cum. Sales Growth is

the compounded annual growth rate of sales over the last three years. All these firm

characteristics are measured with a one-year lag to Q.


Table 4 reports the results of the association between academic directors and firm

performance using both OLS (Columns 1 and 2) and firm and year fixed-effect


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regressions (Columns 3 and 4). In Column 1, we find that the coefficient ofAcademic is

significantly positive at the 5% level. The economic magnitude of the coefficient is about

0.057, indicating that industry adjusted Tobins Q is about 5.7 percentage points higher

for firms with academic directors than firms without academic directors. The result seems

to support our hypothesis that the presence of academic directors is associated with

higher firm performance.

In Column 2, we find the coefficient ofAcademic Ratio is positive and significant

at the 1% level. The coefficient shows that a 1% increase in academic directors in a

boardroom could increase the firm's industry adjusted Q about 0.87 percentage points.

The results indicate that both the presence of professor directors and the relative number

of professor directors matters to firm performance.12

One potential problem with OLS regression is the omitted-variable bias. We

mitigate this concern by using firm-level fixed-effect regressions to control for time-

invariant unobservable firm characteristics that may affect both the choice of academic

directors and firm performance. This approach is widely used in the board literature (Fich

and Shivdasani, 2006; Adams and Ferreira, 2009; Masulis, Wang and Xie, 2012). The

results in Columns 3 and 4 further confirm the positive and significant relation between

academic directors (both the presence the relative size) and firm performance. In terms of

economic magnitudes of the coefficients, we find the coefficient forAcademic is higher,

while the coefficient forAcademic Ratio is lower compared to OLS regression results.

Coefficients for other board variables are in line with those reported by other

studies. We find that both board independence and board size have no significant

12 We also use Q as a dependent variable, and the estimated coefficients of both Academic and Academic

Ratio are still positive and significant.


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relations with firm performance (Baysinger and Butler, 1985; Hermalin and Weisbach,

1991; Mehran, 1995; Bhagat and Black, 2001). Board duality is positively related to firm

performance (Coles, McWilliams, and Sen, 2001).

Consistent with our expectations and prior findings, we find that firm size and

leverage are negatively related to firm performance. We also find that R&D, cash

holdings, and sales growth are all positively related to the industry adjusted Q. We detect

a significant, positive, and non-linear relation between inside ownership and firm

performance when we use fixed-effect regressions. The negative relation between G-

index and firm performance only holds for OLS regressions but not for fixed-effect

regressions.

In sum, results presented in Table 4 indicate that both the presence of academic

directors and the relative size of academic directors are positively related to firm

performance as measured by industry adjusted Q. Therefore, directors from academia

appear to be valuable for firms.

4.2. Robustness checks

Our first set of robustness checks is to deal with the possible measurement errors

in Q. We further estimate the impact of academic directors on an accounting measure of

performance, since this measure is less likely to be driven by growth opportunities. We

rerun models (1) and (2) of Table 4 using the industry adjusted ROA as the dependent

variable. These regressions produce results that are consistent with those in Column 1 and

Column 2 of Table 4. In Column 1 of Table 5, the coefficient of the dummy variable

Academic is positive and significant at the 5% level. This estimate indicates that industry


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adjusted ROA is about 0.6 percentage points higher in firms with academic directors. In

Column 2, we find the coefficient ofAcademic Ratio is also positive and significant at the

1% level. The estimate shows that a 1% increase in academic directors in a boardroom

could increase the firm's industry adjusted ROA about 0.05 percentage points.


The fixed-effect regressions control for potential omitted variables. However, as

professors may not be randomly assigned to boards, the potential problem of endogeneity

of the choice of academic directors is still unaddressed. To deal with this issue, we use an

instrument variable technique. Based on our selection model results in Table 3, we

choose Distance as an instrument forAcademic, as we find that Distance is highly

correlated withAcademic,butit is less likely related to firm performance. We report the

second stage results in Column 3 of Table 5. We find that the coefficient of fitted

Academic is 0.097 and is significant at the 5% level. The result indicates that the positive

relation between academic professors and firm performance is robust after considering

the potential endogeneity problem.

To mitigate statistical concerns arising from cross-sectional correlation, we

estimate the baseline model of Column 1 of Table 4 using the Fama-MacBeth method.

More specifically, we estimate the model by years, and then test the statistical

significance of the average coefficients using a t-test. The results are in Column 4 of

Table 5. We find that the coefficient ofAcademic is significantly positive. In Column 5,


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to mitigate the influence of the outlier effect, we perform a median regression. The results

also hold.

In the earlier studies, we include finance and utility firms in our sample. As

financial companies and utility firms may perform differently compared to other

companies, some studies exclude these firms (e.g., Yermack, 1996). We retest our main

analysis using a reduced sample in which we exclude finance and utility firms. We find

that the results (not tabulated) hold after using this reduced sample. Lastly, Duchin,

Matsusaka and Ozbas (2010) argue that the effectiveness of outside directors depends on

the cost of acquiring information about the firm. Outsiders improve firm performance

when information cost is low and hurt firm performance when information cost is high.

Following Duchin, Matsusaka and Ozbas (2010), we collect analyst forecast information

from I/B/E/S. we use standard deviation of analyst forecast as the measure of the

information cost.13

We construct a dummy variable, Higher Information Cost, which

equals one if a firms analyst forecast standard deviation is above median value, and zero

otherwise. We interact Academic with Higher Information Cost. The results (not

tabulated) show that the interaction term, Academic *Higher Information Cost, is

insignificant, indicating that the impact of academic directors on firm performance is not

influenced by the information cost.14

4.3. Difference-in-difference regression results

To further mitigate endogeneity concerns, such as time-variant omitted variable

effect and causality issues, we conduct a difference-in-difference analysis. Our testing

13 Using absolute error of analyst forecast yields similar results.14 We also examine the non-linearity of academic directors by including a square term of academic ratio.

We do not find a non-linear relation between academic directors and firm performance.


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sample is the firms with academic directors. The IRRC database provides the year in

which the director begins his or her board service. Therefore we construct a dummy

variablePost, which equals one if a year is after an academic director is appointed, and

zero otherwise. For fair comparison, we also apply the following filters: (1) each

academic director should be in office consecutively for at least 2 years; (2) if a firm has

more than one change of academic directors, we only count the earliest change for each

firm; (3) we exclude firms that have no pre-academic director appointment information.

The final testing sample includes 1,690 observations.

We next construct a control sample from the other outside director appointments

sample. We apply a one-to-one propensity score match based on industry, year, assets,

and leverage. This procedure ensures that each observation in the testing sample is paired

with an observation in the control sample. We estimate OLS regression using a sample

that pools the testing sample and the matching sample.

Results from the difference-in-difference regression are reported in Column 6 of

Table 5. We find that the coefficient ofPostis insignificant, indicating that there is not a

significant difference between pre- and post-period for firms with nonacademic director

changes in terms of firm performance. The coefficient of the interaction term between

Post and Firms with academic directors, which captures the incremental effect of

academic directors on firm performance in the post period, is 0.179 and is significant at

the 1% level. Hence, compared to firms with nonacademic director changes, academic

directors increase firm performance more significantly after their appointments. The


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results also suggest that academic directors bring about, and not merely reflect, an

improved firm performance.15

4.4. Long-run event study results

Ideally, we could conduct a short-run event study to examine market reactions to

the news of appointments of academic directors. However, there are several difficulties

which could make the results noisy and less informative. First, perform a valid short-run

event study we have to know the exact dates of events. However, unlike other events,

such as earnings announcements and stock splits, the exact dates of director appointments

are ambiguous. Prior studies generally search director appointment dates from The Wall

Street Journal orLexis/Nexis. However, information from those media resources is

known to be subject to leakage. Second, according to regulation requirements, most

board appointments occur either at scheduled board meetings that involve other

information releases or are communicated through proxy mailings and ratified by

shareholders at annual meetings. In addition, it is common for there to be multiple

additions to the board or simultaneous appointments and reassignments of directors.

Given these complicities, the short-term event study results are more likely to be

contaminated by confounding events. Third, results from short-run event studies are very

sensitive to the sample selection problem.

If firm performance is in fact enhanced due to the appointments of professors as

outside directors, we expect to find positive long-run market reactions following the

15 Using the same difference-in-difference methodology, we also investigate how the departure of academic

directors from boards affects firm performance. In our sample, 1,180 firm-year observations experienced

such departures of academic members from the board (we only considered cases in which the board did not

appoint a new academic member to the board in the post-departure period). We observe that firm

performance is significantly lower for the post-departure period compared to the pre-departure period.


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appointments of professor directors. As we do not necessarily need the exact appointment

dates for the long-run study, we can use the whole S&P 1,500 director sample. We trace

each directors first year of appointment as an outside director, and we require that each

director should be on the same board consecutively for at least 3 years excluding the

appointment year. Our final sample includes 870 observations.

Our long-run event study is based on Fama-French Three-Factor Model.

Specifically, for each calendar month in our sample period, we form a rolling portfolio of

sample firms that have appointed academic directors. We then regress the portfolio

excess return on the Fama and French three factors as follows:

tttftmtftpt hHMLsSMBRRRR )()(

wherept

R is the return on the portfolio of sample firms in month t;mt

R is the

return on the equally-weighted index of NYSE, Amex, and NASDAQ stocks in month t;

ftR is the 3-month T-bill yield in month t; tSMB is the return on small firms minus the

return on large firms in month t; and tHML is the return on high book-to-market stocks

minus the return on low book-to-market stocks in month t. The factor definitions are

described in Fama, French, Booth, and Sinquefield (1993). The sample period is January

1998 to December 2008 (132 months). If the model adequately describes returns, we

expect the value of the intercept, , which measures abnormal returns, is zero under the

null hypothesis of no abnormal performance.



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Panel A of Table 6 reports equal-weighted one-year stock performance of

academic director portfolio. We find that the estimated coefficient of the intercept, , is

0.012 and significant at the 5% level, indicating that firms with academic directors

exhibit positive abnormal returns over the one-year period following the academic

director appointments. Economically, the 1.2% abnormal returns per month compound to

about 15% abnormal returns in a year.16

Panel B reports two-year market performance following academic director

appointments. The estimated coefficient of the intercept is 0.016 and significant at the 1%

level. When we test three-year market performance following academic director

appointments in Panel C, we find the estimated coefficient of the intercept is 0.011 and

marginally significant at the 10% level.

In summary, the results in Table 6 suggest that the market reacts positively to the

appointments of academic directors in the long-run period. Firms with academic directors

outperform in the market. The results provide further evidence that academic directors

impact firm performance positively.

5. The monitoring and advising roles of academic directors

In this paper, we hypothesize that the monitoring and advising roles of academic

directors lead them to improve firm performance. To provide evidence for this argument,

we examine how the presence of academic directors affects several important operational

decisions. These tests provide possible channels through which academic directors affect

firm performance.

16 The results are similar when we use weighted least squares instead of OLS.


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5.1. Comparison between academic directors and nonacademic outside directors

Our results show that academic directors affect firm performance positively,

while board independence has no impact on firm performance. This begs the question:

are academic directors more effective than other outside directors? Following Adams and

Ferreira (2009), we compare individual and governance characteristics between academic

directors and outside directors who are not professors.


Adams and Ferreira (2009) point out that attendance behavior and committee

assignments are important indicators of the quality of directors. In Table 8, we

univariately test the differences between these two groups of outside directors. The IRRC

data reports directors who do not meet the SECs 75% attendance threshold in a given

year. We construct a dummy variable, Less attendance, that equals one if a director does

not meet the SECs 75% attendance threshold in a given year, and zero otherwise. We

find that academic directors are less likely to have attendance problems than other outside

directors. While 2.5% of nonacademic outside directors attend less than 75% of board

meetings in a given year, the percentage for academic directors is 1.9%, and the mean

difference of 0.6% is significant at the 1% level. The result of attendance behavior

indicates that academic directors are better at board governance than nonacademic

outside directors.

In addition, academic directors are also more likely to sit on committees than

nonacademic directors. On average, academic directors hold 1.68 committee


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memberships, but nonacademic outside directors hold 1.41 committee memberships. The

mean difference is significant at the 1% level. Furthermore, when we compare committee

assignments of each specific committee between these two groups, we find that academic

directors are more likely to sit on the audit committee, corporate governance committee,

and nomination committee, but are less likely to sit on the compensation committee. The

results show that academic directors are more likely to sit on a monitoring-related

committee than other outside directors.

The other results in Table 7 are also interesting. The percentages of women and

minorities in the academic director sample are much higher than those in the

nonacademic outside director sample. The result seems consistent with Adams and

Ferreira (2009), who find that female directors are less likely to have attendance

problems and are more likely to sit on certain committees than male directors. Academic

directors also hold far fewer shares than other outside directors. Although the average age

of academic directors is lower than that of other outside directors, there is no significant

difference in director tenure between these two groups.

5.2. Academic directors, CEO compensation, and CEO turnover

If academic directors are effective monitors, we would expect that they affect

CEO compensation policy. To test this conjecture, we obtain CEO compensation

information from ExecuComp database.



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In Column 1, Panel A of Table 8, we first examine how academic directors impact

CEO total compensation. We find that the presence of academic directors has a

significantly negative effect on CEO compensation. Economically, we find CEO

compensation at firms with academic directors is about 151,000 USD lower than that at

firms without academic directors, indicating that boards with academic directors are more

effective in monitoring CEOs, which leads to fewer agency problems.

We further separate CEO compensation into cash-based (cash and bonus) and

equity-based (stock and option) compensation. We rerun our regressions using these two

as dependent variables. The results in Columns 2 and 3 of Panel A show that the presence

of academic directors significantly reduces CEO cash-based compensation, but the effect

on CEO equity-based compensation is insignificant. The results indicate that boards with

academic directors do not forgo CEO incentive compensation, but control for cash based

payments to CEOs.

We also examine the sensitivity of CEO turnover to firm performance. If

academic directors are better monitors, we should observe an increased CEO turnover-

performance sensitivity. We obtain CEO turnover information from ExecuComp and

stock return information from CRSP. We define CEO turnover as the last year a CEO

holds the office.

We estimate a probit regression in Column 4 of Panel A. The dependent variable

is a dummy variable indicating the last year the CEO appears in the ExecuComp dataset.

Firm stock return is the buy-and-hold stock return over the fiscal year. Industry return is

the median stock return of all firms in the same two-digit SIC code. We construct

industry adjusted stock return by subtracting industry return from firm stock return.


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Consistent with prior studies such as Warner, Watts and Wruck (1988), we find that poor

firm performance increases the possibility of CEO turnover. The coefficient of our

interest variable,Academic * Industry adjusted return, is negative and significant at the 1%

level, indicating that CEO-firm performance sensitivity is significantly increased when

firms have academic directors on boards.

Overall, the results in Panel A of Table 8 suggest that the presence of academic

directors strengthen the effectiveness of boards in overseeing management. Boards with

academic directors can better control for CEO overpay and replace underperforming

CEOs when necessary compared to boards without academic directors.

5.3. Academic directors and earnings quality

Prior studies find that corporate boards make a significant impact on earnings

management (Klein, 2002). If academic directors can effectively monitor the financial

accounting process, we would expect that mangers are less likely to manipulate earnings.

In Column 3, we test our conjecture. Following prior studies, we use discretionary

accruals as the measure of earnings management. Discretionary Accruals is calculated

based on the modified cross-sectional Jones model (Jones, 1991) as described in Dechow,

Sloan and Sweeney (1995). We find that the coefficient ofAcademic is -0.056 and is

significant at the 1% level, indicating that firms with academic directors have lower level

of earnings management than firms without academic directors.

While discretionary accruals include within-GAAP earnings management, firms

may be subject to Accounting and Auditing Enforcement Releases (AAERs) by engaging

in earnings manipulations in violation of GAAP. Following Dechow, Sloan and Sweeney


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(1996), we identify firms with AAERs in which actions are brought against firms

pursuant to Section 13(a) of the Securities Exchange Act of 1934. We use a dummy

variable,AAER, which equals one if the firm is subject to SEC enforcement action for a

given fiscal year, and zero otherwise. The results using this dependent variable is in

Column 2 of Panel B. Consistent with our expectation, we find a negative relation

between the presence of academic directors and earnings management in violation of

GAAP. The result reinforces the notion that academic directors play an important

monitoring role as observed by improved earnings quality.

Hutton, Marcus and Tehranian (2009) find that stock prices of firms with high

quality earnings reflect more firm-specific information. Gul, Srinidhi and Ng (2011)

show that board gender diversity affects the informativeness of stock prices through the

increased public disclosure quality. We expect that academic directors could increase the

informativeness of stock prices because of their governance role. We test this conjecture

in Column 3 of Panel B, Table 5. Following Morch, Yeung and Yu (2000) and Hutton,

Marcus and Tehranian (2009), we first calculate2

,tiR by regressing firm weekly returns on

industry weekly returns (Fama and French industry) and market returns for each firm

year. Then we measure stock price informativeness (dependent variable) by logistic

transformation of the ratio (1-2

,tiR )/

2

,tiR . Consistent with our prediction, we find that the

coefficient ofAcademic is 0.102 and is significant at the 5% level, indicating that stock

prices of firms with academic directors are more informative than stock prices of firms

without academic directors.

5.4. Academic directors and innovation


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Innovation can be crucial for the development and performance of the firm. If

firms appoint academic directors for their special expertise, we expect those firms should

be more innovative than firms without academic directors. In Column 4 of Panel B we

examine how academic directors affect innovation. Our dependent variable is

Log(Patent). Patent is the number of patents. Patent information comes from the NBER

patent dataset. We find that the coefficient ofAcademic is 0.232 and is significant at the 1%

level, indicating firms with academic directors are more innovative than firms without

academic directors.

5.5. Academic directors and acquisition decisions

The takeover market is a means to study boards and their roles in corporate

governance (Shivdasani, 1993; Hermalin and Weisbach, 2003). Prior studies find that

boards of directors play both monitoring and advising roles during acquisitions (Byrd,

1992; Masulis, Wang and Xie, 2012). If academic directors are effective monitors and

valuable advisors, we expect that acquirer firms with academic directors make better

acquisition decisions.

To test our conjecture, we obtain merger and acquisition information from the

Securities Data Corporation (SDC), and then we match with our academic director

sample. Our final sample includes 7,960 acquisitions for our S&P 1,500 sample firms

from 1998 to 2006. We measure an acquirers performance by its cumulative abnormal

returns by the 3-day event window (-1, 1), where date 0 is the announcement date from

SDC.17

Column 5 of Panel B reports the results on how academic directors affect

acquisition performance. We find that the coefficient ofAcademic is 0.006 and is

17 The results hold when we use a 5-day event window.


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significant at the 1% level, indicating firms with academic directors make better

acquisition decisions than firms without academic directors.

Taken together, Tables 7 and 8 provide supportive evidence to show that

academic directors are effective monitors and valuable advisors. The results also provide

possible channels through which academic directors affect firm performance positively.

6. Additional analysis

6.1. The occupational backgrounds of professors and firm performance

In this sub-section, we examine whether academic directors with and without

administrative positions have different impacts on firm performance. Toward this end, we

rerun our fixed-effect regression displayed in Table 4, replacing the dummy variable

Academic with two separate dummy variables: Professor, which indicates academic

directors without administrative positions, andAdministrative, which indicates academic

directors with administrative positions. The results are in Panel A of Table 9.


As Panel Ashows, the coefficient ofProfessoris 0.103 and is significant at the 5%

level, but the coefficient ofAdministrative is insignificant.18

The results indicate that the

positive association between academic directors and firm performance is mainly

18 We perform an F test to reject (at the 1% level) the hypothesis that the estimated coefficients of

ProfessorandAdministrative are the same.


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attributed to academic directors who do not have administrative jobs in academia, but not

to academic directors with administrative positions.19

Why do two groups of directors from academia have different impacts on firm

performance? We think about two possible reasons that may hinder academic directors

with administrative jobs as effective monitors and valuable advisors. First, academic

directors with administrative positions may be less independent than those without

administrative jobs. It is more likely that those university presidents and deans have some

kinds of connections with the companies, or have personal relationships with the

managements. For example, it is less likely that a university president has strong

incentives to monitor the CEO if the company contributes money to the universitys

endowment.

Second, based on the busy director argument (Adams, Hermalin, and Weisbach,

2008; Fich and Shivdasani, 2006), we conjecture that are busier than professors without

administrative jobs. Thus, professors with administrative jobs may be less likely to

devote themselves to their board duties than professors without administrative jobs. We

use board-attendance behavior to test this hypothesis. As discussed, attendance behavior

is very important for directors because it is the major way they obtain information and

fulfill their monitoring and advising responsibilities (Adams and Ferreira, 2009). We use

a probit regression to test the board-attendance differences between academic directors

with and without administrative positions.

Panel B of Table 9 shows the regression results. The dependent variable is Less

attendance as we described earlier. In Column 1, we only include dummy variable

19 We exclude observations with more than one academic director to rule out the possibility that a

boardroom has both professor and administrative. The results hold.


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Professorin the regression. The coefficient is about -0.340 and significant at the 1% level.

In Column 2, we control for other director variables that might affect a directors

attendance behavior. The significant and negative coefficient of Professor further

indicates that academic directors without administrative jobs are more likely to attend

board meetings compared to academic directors who have administrative positions. The

different attendance behaviors provide some evidence about why these two groups of

directors have different impacts on firm performance. Other results in Panel B show that

women directors are more likely to attend board meetings than men directors, which is

consistent with Adams and Ferreira (2009). We also find that Caucasian directors and

Native American directors are more likely to attend board meetings, while directors with

more outside directorships are less likely to do so.

6.2. The educational backgrounds of professors and firm performance

Finally, we investigate whether the educational backgrounds of academic

directors also affect their effectiveness and consequent firm performance. We manually

collected information about the area of study in which each professor earned his or her

highest degree. We then group the professors into categories, such as education,

technology (including science and engineering), business-related (including finance,

accounting, economics, and other business majors), law, medicine, political science, and

others. We examine how educational backgrounds of academic director affect firm

performance using the sample firms with academic directors. The results are in Table 10.



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In Column 1, we find that different areas of study have different impacts on firm

performance. Specifically, academic directors with business-related degrees have the

most positive effects on firm performance, followed by academic directors with

technology degrees and with political degrees. However, academic directors with law,

education, and medical degrees have no significant impacts on firm performance.

Several papers, such as Guner, Malmendier, and Tate (2008), discuss the impact

of financial expertise on corporate decision-making. Additionally, the Sarbanes-Oxley

Act requires that audit committees include at least one financial expert. In our study, we

provide some empirical evidence of the benefits of having financial experts on boards.

Agrawal and Knoeber (2001) find companies with higher litigation risk and political

capital are more likely to elect lawyers and politicians to their boards. Our results show

that academic directors with political backgrounds affect firm performance positively.

Does the background matching between academic directors and firms lead to a

more pronounced effect of academic directors on firm performance? To test this

conjecture, we examine whether professor directors with business-related backgrounds

have more significant impacts on financial firms performances. In Column 2, we interact

Business andFinancial companies (SIC Code 6000-6900). We find that the coefficient of

the interaction term is insignificant, indicating that the impact of business professor

directors on performance is not significantly different between financial companies and

non-financial companies. Non-financial companies also benefit from professor directors

with business backgrounds. In Column 3, we further test whether academic directors with

science and engineering backgrounds are more important for technological company


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performance. We interact Technology and High-tech companies. Again, we find the

coefficient of the interaction term is also insignificant.

7. Conclusion

This paper empirically investigates whether the presence of academic directors

affects firm performance and corporate governance. Based on the independence theory,

expertise theory, and diversity theory, we hypothesize that academic directors can

improve board efficacy and subsequent firm performance because of their monitoring

abilities and advising abilities. The key result is in line with our hypothesis. We find that

the presence of directors from academia in the boardroom is associated with higher firm

performance. The positive association holds after controlling for firm- and other

governance-specific characteristics, and considering endogeneity issues, such as omitted

variable bias, self-selection bias and causality issue. By comparing the differences in the

attendance behavior and committee assignments of academic directors and other outside

directors, we find that academic directors perform better than other outside directors in

the boardroom.

We further examine the monitoring and advising roles of academic directors in

details. We find that firms with academic directors have higher CEO turnover-

performance sensitivity, lower cash-based CEO compensation, more patent numbers,

higher acquisition performance, higher stock price informativeness, and are less likely to

manage their earnings. The results provide several channels through which academic

directors affect firm value positively.


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We also find evidence that academic directors with administrative jobs do not

improve firm performance as much as academic directors without administrative jobs.

Additional analysis finds that academic directors with administrative jobs have more

severe board-meeting attendance problems. Furthermore, we find that academic directors'

areas of study have different impacts on firm performance.

Our paper is the first to focus entirely on the impact of academic directors on

corporate governance and firm performance. Our analysis extends the literature on board

characteristics and firm performance. We find that directors from academia are beneficial

to shareholders. Our results indicate that both directors' monitoring and advising

functions are important for board efficacy and firm performance. Furthermore, our study

complements the board-independence literature by showing that independence is not

enough to enhance board efficacy. Additional director attributes, such as advising

abilities, could be important for making outside directors more beneficial to firm value.

Therefore, this paper furthers our understanding on the relation between board

independence and firm value.


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Warner, J.B., Watts, R.L., Wruck, K.H., 1988. Stock prices and top management changes. Journal of


Yermack, D.L., 1996. Higher market valuation of companies with a small board of directors. Journal of



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Table 1: Distribution of Corporate Directors from Academia

This table presents distribution of the total 6,742 corporate directors from academia by year, primary title of directors and majors. The sample isdrawn from the IRRC database for the 1998 to 2006 period. The directors' areas of study are based on their primary doctoral degrees.

Panel A: by Year

1998 1999 2000 2001 2002 2003 2004 2005 2006 Total

Number 742 867 797 750 638 723 755 745 725 6742

Percentage 11.01 12.86 11.82 11.12 9.46 10.72 11.20 11.05 10.75 100.00

Panel B: by Title

Professor President Dean Chancellor

Program

Director

Department

Chair Others Total

Number 2668 1864 1007 256 255 202 490 6742

Percentage 39.57 27.65 14.94 3.80 3.78 3.00 7.27 100.00

Panel C: by Major

Business

Engineering

& Science Medical Political Law Education Others Total

Number 2617 1104 990 696 508 141 686 6742Percentage 38.82 16.37 14.68 10.32 7.53 2.09 10.18 100.00


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Table 2: Summary Statistics

This table presents descriptive statistics for the firm-year full sample. The sample is for the 1998 to 2006 period. Qis Tobins Q which is measured asthe ratio of the firms market value to its book value. The firms market value is calculated as the bo ok value of assets minus the book value of equity

plus the market value of equity.ROA is the ratio of net income before extraordinary items and discontinued operations to its book value of assets.AdjQ is the industry-adjusted Tobins Q, which is a firms Tobins Q minus the median Tobins Q in the firms industry in the observation year. Adj

ROA is the industry-adjusted ROA, which is a firms ROA minus the median ROA in the firms industry in the observation year. A firms industry is

defined by the firms two digit primary SIC code. Academic is a dummy variable that equals one if a firm has at least one academic director; iequals zero otherwise. Academic Ratio equals the ratio of academic directors to the board size. Independence is the percentage of independen

directors (exclude academic directors) on the board. Size is the total number of directors on the board.Duality is a dummy variable that equals one i

the CEO is also the chairman of the board, and 0 otherwise. Female Directoris a dummy variable that equals one if at least one director is a femaleit equals zero otherwise. Interlockis a dummy variable that equals one if at least one director is an interlocked director; it equals zero otherwise.

DirectorAge is the average age of all directors. Director Tenure is average tenure of all directors. Directorship is the average number o

directorships directors hold. Asset equals the firm's total assets. Leverage is the book value of debt over total assets. R&D equals total R&Dexpenditures divided by total assets. Cash is cash and short-term investments over total assets. Cum. Sales Growth is the compounded annual growthrate of sales over the last three years. All firm characteristics are measured with a one-year lag compared to Q.Insider Ownership is the percentage ooutstanding shares top management owns. G-Index is the Gompers, Ishii, and Metrick (2003) governance index.

Variable N Mean Std. Dev. P25 P50 P75

Firm Performance

Q 9498 1.994 1.504 1.166 1.515 2.224

Adj. Q 9498 0.675 1.481 -0.105 0.223 0.918

ROA 9498 0.132 0.107 0.077 0.129 0.186Adj. ROA 9498 0.065 0.109 0.005 0.056 0.114

Board Characteristics

Academic 9498 0.360 0.480 0.000 0.000 1.000

Academic Ratio 9498 0.052 0.086 0.000 0.000 0.100

Independence 9498 0.648 0.179 0.545 0.667 0.800

Size 9498 9.417 2.875 7.000 9.000 11.000

Duality 9498 0.773 0.419 1.000 1.000 1.000

Female Director 9498 0.571 0.495 0.000 1.000 1.000

Interlock 9498 0.072 0.258 0.000 0.000 0.000

Director Age 9498 58.878 4.118 56.000 59.000 62.000

Director Tenure 9498 3.542 1.055 2.875 3.560 4.000

Directorship 9498 2.961 2.422 1.000 3.000 4.000

Director Ownership 9498 0.095 0.176 0.000 0.023 0.101

Firm Characteristics

Asset (Million) 9498 10932 54218 503 1433 4871

Leverage 9498 0.225 0.188 0.063 0.209 0.343

R&D 9498 0.029 0.057 0.000 0.000 0.034

Cash 9498 0.136 0.171 0.019 0.060 0.188

Cum. Sales Growth (3 years) 9498 0.185 0.335 0.038 0.114 0.231

Insider Ownership 9498 0.029 0.076 0.000 0.000 0.016

G-index 9498 9.337 2.360 8.000 9.000 11.000


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Table 3: The Appointments of Academic Directors

This table presents probit regression about the selections of academic directors. The dependent variable is Academic Director Appointment, which ia dummy variable that equals one if a firm appoints an academic director; it equals zero if a nonacademic outside director is appointed. Q is the ratioof the firms market value to its book value. The firms market value equals the book value of assets minus the book value of equity plus the market

value of equity.Log (Asset) is the natural log of total assets of the firm. R&D equals total R&D expenditures divided by total assets.Distance (


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SIC4000-4999 (Transportation & communications) 0.518*** 0.529*** 0.535***

(3.68) (3.74) (3.78)

SIC5000-5999 (Wholesale & retail trade) -0.273** -0.288** -0.274**

(-2.01) (-2.09) (-1.98)

SIC6000-6999 (Financial services) 0.295** 0.311** 0.320**

(1.97) (2.05) (2.11)

SIC7000-7999 (Travel & entertainment) 0.108 0.084 0.085

(0.75) (0.58) (0.59)

SIC8000-8999 (Other services) -0.100 -0.103 -0.105

(-0.55) (-0.56) (-0.57)

Year effect Y Y Y

Observations 4,254 4,254 4,254

Pseudo R2 0.245 0.248 0.249


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Table 4: Academic Directors and Firm Performance

This table presents the OLS and firm and year fixed effect regression results of the relation between academic directors and firm performance. Thedependent variables areAdj. Q. Qis Tobins Q which is measured as the ratio of the firms market value to its book value. The firms market value i

calculated as the book value of assets minus the book value of equity plus the market value of equity. Adj. Q is the industry-adjusted Tobins Qwhich is a firms Tobins Q minus the median Tobins Q in the firms industry in the observation year. A firms industry is defined by the firms twodigit primary SIC code.Academic is a dummy variable that equals one if a firm has at least one academic director; it equals zero otherwise.Academic

Ratio equals the ratio of academic directors to the board size. Independence is the percentage of independent directors (exclude academic directors)

on the board. Log (Size) is the natural log of the total number of directors. Duality is a dummy variable that equals one if the CEO is also thechairman; it equals zero otherwise.Log (Asset) is the natural log of the firm's total assets. Leverage is the book value of debt over total assets. R&D

equals total R&D expenditures divided by total assets. Cash is cash and short-term investments over total assets. Cum. Sales Growth is thecompounded annual growth rate of sales over the last three years. All fi

Documents

Professors in the Boardroom and their impact on corporate governance and firm performance