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Playing Favorites? Industry Expert Directors in Diversified Firms

  • Jesse A. Ellis, C. Edward Fee and Shawn Thomas


We examine the influence of outside directors’ industry experience on segment investment, segment operating performance, and firm valuation for conglomerates. Given board composition is endogenous, we instrument for the presence of industry expert directors using the supply of experienced executives near conglomerate firms’ headquarters. We find that industry expert representation on the board causes increased segment investment. Consistent with experienced directors playing favorites rather than acting as dispassionate advisors, segment profitability (firm value) is lower for segments (firms) with industry expert outside directors. We do not find analogous negative profitability or valuation effects of director experience for single-segment firms.


Corresponding author

*Ellis,, North Carolina State University Poole College of Management; Fee (corresponding author),, Tulane University Freeman School of Business; and Thomas,, University of Pittsburgh Katz Graduate School of Business.


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We thank Claudia Custodio (the referee), David Denis, Diane Denis, Jarrad Harford (the editor), Andrew Koch, Leming Lin, and seminar participants at the University of Arizona, Texas A&M University, and Tulane University for helpful comments and suggestions. Any errors remain our own.



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Playing Favorites? Industry Expert Directors in Diversified Firms

  • Jesse A. Ellis, C. Edward Fee and Shawn Thomas


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