Is Board Industry Experience a Corporate Governance Mechanism?

We analyze the valuation effect of board industry experience and channels through which industry experience of outside directors affects firm value. Firms with more experienced outside directors are valued at a premium compared to firms with less experienced outside directors. Additional tests indicate that our results stem from within-firm variation and that board industry experience causes higher firm values. Firms with experienced boards exhibit lower investment-cash flow sensitivities, build up valuable financial slack by holding cash, shape operating policies, and provide better incentivized compensation packages to CEOs. Our results suggest that board industry experience is a valuable corporate governance mechanism.