The Effect of Director Expertise on Acquisition Performance

Corporate boards contribute to firm value by providing oversight and advice during major strategic decisions such as acquisitions. This study posits that boards’ effectiveness in evaluating these strategic events can be enhanced by directors’ prior experience in acquisitions. I find that outside directors’ prior involvement in acquisitions is associated with a significant increase in acquisition announcement returns. Further analysis identifies two potential channels for this effect. First, firms with higher board acquisition expertise are better at target selection: they choose targets with higher synergies and are more likely to avoid large loss acquisitions. Second, firms with higher board acquisition expertise negotiate more effectively, by securing higher relative gains. Overall, the results demonstrate that outside directors with relevant experience can improve the quality of a firm’s strategic decision-making. *Department of Finance, Smeal College of Business, Penn State University, University Park, PA 16802. E-mail address: [email protected]. Fax: 814-865-3362. I thank James Conklin, Moussa Diop, Laura Field, Peter Iliev, Yelena Larkin, Michelle Lowry, Karl Muller, Zhan Shi, Jess Smith, Jianing Zhang, and the participants of a workshop at Penn State University for helpful comments.