What do they know? The effects of outside director acquisition experience on firm acquisition performance

Michael L. McDonald, James D. Westphal, Melissa E. Graebner

Research output: Contribution to journalArticle

Abstract

This article contributes to the literature on board effectiveness by being perhaps the first to systematically examine how the nature of outside directors' prior experience, and resulting expertise, will influence the performance of a focal firm's strategic initiatives. Our theoretical model is grounded in the psychological literature on expertise and its role in group decision making effectiveness. We focus on outside director expertise in acquisition decision making, and its implications for the performance of the acquisitions of a focal firm. Our conceptual framework indicates that directors will develop expertise in making particular kinds of acquisition decisions (e.g., related or unrelated acquisitions or acquisitions in specific industries or product markets) through their past experiences at other firms with decisions about those specific types of acquisitions, and we predict that this experience and expertise will have positive effects on the performance of a focal firm's acquisitions. We extend our theoretical model to consider the conditions under which relevant director experience will prove most beneficial. Our model predicts that outside director acquisition expertise will deliver the greatest benefits when the focal firm's board is independent from management. We find empirical support for all of our hypotheses. In considering how and when director experience and resulting expertise may influence the performance of corporate acquisitions, our theory and results help to highlight a potential second main focus for research on the long-standing question of what factors render boards of directors effective.

Original languageEnglish (US)
Pages (from-to)1155-1177
Number of pages23
JournalStrategic Management Journal
Volume29
Issue number11
DOIs
StatePublished - Nov 1 2008
Externally publishedYes

Keywords

  • Acquisitions
  • Board effectiveness
  • Board independence
  • Boards of directors
  • Director experience
  • Director expertise

ASJC Scopus subject areas

  • Business and International Management
  • Strategy and Management

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