Strategic Management Journal

Strat. Mgmt. J., 32: 731–747 (2011)

Published online EarlyView in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.909
Received 17 September 2008; Final revision received 12 November 2010

THE EFFECTS OF BOARD HUMAN AND SOCIAL

CAPITAL ON INVESTOR REACTIONS TO NEW
CEO SELECTION
JIE (JENNY) TIAN,1 * JERAYR (JOHN) HALEBLIAN,2
and NANDINI RAJAGOPALAN3
1
School of Hotel and Tourism Management, The Chinese University of Hong Kong,
Shatin, N.T., Hong Kong
2
Terry College of Business, University of Georgia, Athens, Georgia, U.S.A.
3
Marshall School of Business, Department of Management and Organization, Los
Angeles, California, U.S.A.

This study extends work on independent directors to examine the influence of their human capital
and social capital on investor reactions to the board’s CEO selection decision. We predict that
human capital, as represented by the board’s CEO experience and industry experience, and
social capital, as represented by directors’ co-working experience on the board and external
directorship ties to other corporate boards, will influence the stock market reactions to new
CEO appointments. In a sample of 208 new CEO appointment events in U.S. manufacturing firms
between 1999 and 2003, we found that the stock market reacted favorably to the appointments
made by boards with higher levels of human and social capital. We also found that the effect
of internal social capital was stronger when the new CEO was an insider rather than an
outsider. The implications of the results for director selection and CEO succession are discussed.
Copyright  2010 John Wiley & Sons, Ltd.

INTRODUCTION and board effectiveness has been far from conclu-

Agency theory assumes that independent outside
directors are more effective than inside directors
in monitoring management and protecting share-
holder interests (Fama and Jensen, 1983). How-
ever, the empirical evidence on the link between
board structural independence—most often mea-
sured as the proportion of independent directors —
Keywords: board of directors; human capital; social cap-
ital; CEO selection; stock market reaction
∗
Correspondence to: Jie (Jenny) Tian, School of Hotel and
Tourism Management, The Chinese University of Hong Kong,
Shatin, N.T., Hong Kong.
E-mail: tianjie@baf.msmail.cuhk.edu.hk
sive (Johnson, Daily, and Ellstrand, 1996; Zahra
and Pearce, 1989). This absence of an empirical
link may stem from prior work treating indepen-
dent directors as a homogenous group, rather than
examining differences among them in terms of
their knowledge and skills. Reflecting this con-
cern, emerging theoretical work on ‘board capi-
tal’ argues that while independent outside directors
may have the motivation to be effective monitors,
a board also needs sufficient ability, in the form
of relevant experience, to make the best decisions
(Hillman and Dalziel, 2003).
The literature on board capital identifies two
key elements of board ability: human capital,

Copyright  2010 John Wiley & Sons, Ltd.


732 J. Tian, J. Haleblian, and N. Rajagopalan
defined as context-specific knowledge and skills
obtained through work experience; and social cap-
ital (also known as relational capital), defined
as the resources accessible through the network
of relationships possessed by an individual or a
social unit (Hillman and Dalziel, 2003). Although
recent empirical research supports the argument
that board human capital influences corporate out-
comes (e.g., Kroll, Walters, and Wright, 2008;
McDonald, Westphal, and Graebner, 2008; West-
phal and Fredrickson, 2001), only limited empir-
ical work has examined board human and social
capital simultaneously (Kor and Sundaramurthy,
2009). Previous studies on board capital are also
limited in the sense that they lack a systematic,
task-relevant classification scheme of board cap-
ital and a focus on corporate decisions that are
most likely to be made by the board of direc-
tors. To gain a better understanding of how board
capital affects the board’s effectiveness in its
key decisions, we develop a framework of board
human and social capital and board effectiveness
in chief executive officer (CEO) selection. Hir-
ing the CEO is the most important decision the
board makes (Vancil, 1987). In this study, we
examine how board effectiveness in CEO selec-
tion is influenced by two types of board human
capital—board CEO experience (i.e., directors’
experience of serving as CEOs at other compa-
nies) and board industry experience (i.e., experi-
ence of working in the focal firm’s industry)—and
two types of board social capital—internal social
capital (i.e., directors’ co-working experience on
the focal board) and external social capital (i.e.,
the board’s external directorship ties to other
corporations).
Consistent with prior studies (e.g., Borokhovich,
Parrino, and Trapani, 1996; Brickley, Linck, and
Coles, 1999), we examine board effectiveness by
assessing investor reactions to the appointment of a
new CEO, measured as the abnormal stock returns
following the appointment announcement. Since
the board’s primary responsibility is to increase
firm value, abnormal stock returns can be seen as
an appropriate board effectiveness measure. More
broadly, in the CEO succession literature, abnor-
mal stock returns around the time of CEO succes-
sion are an appropriate firm performance measure
because they represent an unbiased estimate of
investors’ expectations and allow the isolation of
reaction to a specific event (Kesner and Sebora,
1994). The board of directors has been viewed as
Copyright  2010 John Wiley & Sons, Ltd.
10970266, 2011, 7, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/smj.909 by Indian Institute Of Management, Wiley Online Library on [29/09/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
an ‘initiating force’ in CEO dismissals (Friedman
and Singh, 1989: 723) and board-initiated CEO
dismissals in poorly performing firms are asso-
ciated with positive stock market reactions (e.g.,
Borokhovich et al., 1996; Weisbach, 1988). Inter-
estingly, though, compared with its role in firing
an incompetent CEO, the board’s role in finding
a new CEO has been studied less often (Zajac,
1990). Overall, we attempt to answer the following
question: does the stock market value independent
board members’ human and social capital in the
context of new CEO selection?
THEORY AND HYPOTHESES: BOARD
CAPITAL AND CEO SELECTION
Agency theory contends that due to their indepen-
dence from the CEO, boards consisting primarily
of independent outsiders have greater motivation
to monitor management than insiders (Fama and
Jensen, 1983). Building on agency theory work,
board capital theory argues that board indepen-
dence is a necessary, but not sufficient, condi-
tion for effective monitoring and that assessing
board ability in the form of board capital is also
needed.1 Research on board capital draws on work
on human capital (Becker, 1975) and social capital
(Nahapiet and Ghoshal, 1998) and defines human
capital as directors’ experience and expertise and
social capital as the resources available to the
board through its internal and external networks
(Hillman and Dalziel, 2003). The two elements of
board capital differ from each other as human cap-
ital refers to experience embedded within an indi-
vidual, whereas social capital refers to the access
to useful information and resources through social
relationships (Burt, 1997). We argue that boards
will have access to better-quality information and
will develop more effective information process-
ing capabilities if they have high levels of human
and social capital. In particular, board capital is
expected to have a positive effect on board effec-
tiveness in CEO selection as perceived by stock
market investors.
1
To capture both board motivation and ability, we assess board
capital for independent directors. By focusing on independent
directors, we can isolate the effects of board capital (i.e., board
ability) that exist beyond that of structural independence (i.e.,
motivation) variables, and thus help clarify performance impli-
cations of board independence.
Strat. Mgmt. J., 32: 731–747 (2011)
DOI: 10.1002/smj

The effects of human and social capital can be
analyzed with regard to how they affect directors’
performance in the key tasks in the CEO selec-
tion process. The board’s first task is to estab-
lish a strategic mandate for the new CEO, which
includes ‘a forecast of the future environment fac-
ing the corporation, an assessment of the degree
and rate of change that will be required to cope
with that environment, and an identification of the
skills, experience, and foresight required of the
next CEO’ (Vancil, 1987: 27). Its second task is to
identify potential internal and external CEO candi-
dates and assess their knowledge and skills (Vancil,
1987).
We argue that board performance in the first task
depends on the degree to which directors have
human capital developed through their job- and
industry-specific experience. Prior work consistent
with a board human capital perspective suggests
that the more the directors know about the firm’s
business environment and the nature of the CEO’s
job, the better they can match the CEO to the firm
conditions (Vancil, 1987). Therefore, we argue that
directors should make better CEO selection deci-
sions if (1) they have CEO experience, that is,
experience of working as CEOs at other compa-
nies, which improves the directors’ familiarity with
the typical job tasks facing a CEO, and (2) industry
experience, that is, experience of working in the
focal firm’s industry, which improves directors’
understanding of the firm’s business environment.
We thus link these two types of board human cap-
ital to board effectiveness in CEO selection.
Human capital and board effectiveness
in CEO selection
Board CEO experience
Experience with performing a certain task leads to
improved task expertise. More specifically, indi-
viduals with high levels of task experience are
better able to judge the qualifications of others
who perform similar tasks (Bandura, 1997). Con-
sistent with this notion, expert performance is spe-
cific to a particular knowledge area (McDonald
et al., 2008) because individuals with experience
in an area have more densely developed knowl-
edge structures relevant to that area (Day and Lord,
1992). Directors who have experience of work-
ing as CEOs at other companies (‘CEO directors’)
have developed expertise specific to the CEO’s job
Copyright  2010 John Wiley & Sons, Ltd.
10970266, 2011, 7, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/smj.909 by Indian Institute Of Management, Wiley Online Library on [29/09/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Board Capital and CEO Selection 733
position. We predict that directors with CEO expe-
rience will be better able to judge whether a poten-
tial CEO candidate has the attributes that meet the
firm’s strategic requirements. This ability stems
from the director’s own understanding of the con-
tent of the CEO’s job and the corresponding skill
requirements for the job. A CEO’s job knowledge
has a significant tacit element as the knowledge
is not readily available from secondary sources.
Rather, the CEO can only learn from direct expe-
rience of handling complex job tasks, ranging from
integrating functional executives’ diverse informa-
tion and expertise, which requires of the CEO
skills in such areas as communication, leadership,
and conflict resolution (Mintzberg, 1973; Zhang
and Rajagopalan, 2004), to developing a strategic
vision for the firm, representing it to outside con-
stituents, and making complex strategic decisions
(Lorsch and Khurana, 1999). Given their valuable
skill set stemming from CEO experience, current
or retired CEOs are more likely than non-CEOs
to gain seats on the boards of their own firm or
other firms and investors react positively when
firms appoint directors with CEO experience to
their boards (Brickley et al., 1999; Fich, 2005).
These arguments and evidence lead to our first
hypothesis:
Hypothesis 1: There will be a positive relation-
ship between independent board members’ CEO
experience and investor reactions to a new CEO
appointment.
Board industry experience
To hire a CEO, the board must also understand
the industry environment facing the firm (Vancil,
1987). Firms operating in the same industry are
faced with similar sets of technologies, competitive
rules, customer needs, supplier capabilities, and
government regulations (Kor and Misangyi, 2008).
Previous research has shown that decision mak-
ers’ industry-specific experience is a valuable, rare,
and hard-to-imitate resource (Castanias and Helfat,
1991) and that positive performance effects follow
from senior executives’ industry-specific experi-
ence (Kor, 2003). Independent directors with work
experience in the focal firm’s industry will have
particularly relevant knowledge of that industry.
There has been evidence that directors’ industry-
specific experience affects board decisions. For
Strat. Mgmt. J., 32: 731–747 (2011)
DOI: 10.1002/smj

734 J. Tian, J. Haleblian, and N. Rajagopalan
example, it has been reported that outside direc-
tors’ industry-specific experience enables boards
to make acquisition decisions that are positively
received by investors (Kroll et al., 2008). In the
context of CEO selection, reflecting the importance
of industry-specific knowledge, boards are more
likely to hire from within the industry even when
they seek a new CEO from outside the firm (Par-
rino, 1997). Moreover, directors who have had
firsthand work experience in the firm’s indus-
try are likely to have tacit knowledge of indus-
try opportunities and constraints and to develop
a more nuanced understanding of the industry
(Rajagopalan and Datta, 1996; Vancil, 1987). This
allows for a more accurate assessment of the
fit between potential CEO candidates and indus-
try contingencies. These benefits of directors’
industry-specific experience may be particularly
salient for nondiversified firms. In sum, directors
equipped with industry experience should make
better-informed CEO hiring decisions. This brings
us to our second hypothesis:
Hypothesis 2: There will be a positive rela-
tionship between independent board members’
industry experience and investor reactions to a
new CEO appointment.
Board social capital and board effectiveness
in CEO selection
In addition to human capital, social capital should
also affect board outcomes. Group performance
depends in part upon members’ capabilities to pro-
cess and share information obtained from their
internal and external networks of relationships
(Borgatti and Cross, 2003). Boards with strong ties
within the firm and to other strategically related
firms enjoy better access to more and higher qual-
ity information, which results in superior advice
to the firm and better financial outcomes (Carpen-
ter and Westphal, 2001). Based on prior literature,
we distinguish between two types of board social
capital—internal and external—and explain their
impact on board effectiveness in CEO selection as
follows.
Internal social capital and board co-working
experience
In work groups, internal social capital is developed
through group members’ experience of working
Copyright  2010 John Wiley & Sons, Ltd.
10970266, 2011, 7, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/smj.909 by Indian Institute Of Management, Wiley Online Library on [29/09/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
together. Shared co-working experience makes it
possible for group members to develop a ‘bond-
ing’ form of social capital owned collectively by
all group members (Adler and Kwon, 2002). In
the board context, we argue that directors’ co-
working experience provides the board with both
ability and opportunity benefits. First, co-working
experience improves board ability by allowing
directors to develop tacit firm-specific knowledge.
Given that most independent directors have pri-
mary, full-time positions outside the firm and
only serve their board duty on a part-time basis,
their experience of working together on the focal
board provides them with perhaps the only chance
to learn about the firm’s idiosyncratic strategic
issues. The importance of group co-working expe-
rience as a source of valuable firm-specific knowl-
edge has been discussed as early as in Penrose’s
(1959) seminal work. She observed that a col-
lection of individuals who have had experience
working together are able to provide ‘produc-
tion services’ that are valuable and unique to the
firm. Admittedly, independent directors can obtain
information about the firm’s business from sec-
ondary sources (e.g., from corporate documents or
business media), but it is difficult for directors to
put secondary information ‘into perspective’ and
interpret its meaning within the firm’s context if
they do not have adequate firm-specific knowl-
edge. Every firm faces a unique set of challenges
at the time of CEO selection (Conger, Finegold,
and Lawler, 1998). Board members with little co-
working experience may initiate a strategic man-
date containing only generic or even misinformed
descriptions about the firm’s strategic needs and
the desired CEO characteristics (Khurana, 2001).
By contrast, boards with long co-working expe-
rience may be better able to interpret the strate-
gic implications of the challenges and specify the
characteristics of the new CEO needed to address
those challenges (Charan, 2005). In this sense,
co-working experience can be seen as a strate-
gic resource owned by the board (Castanias and
Helfat, 1991).
Second, co-working experience creates oppor-
tunities for directors to share and coordinate their
individual expertise and knowledge because, over
time, directors tend to develop a common under-
standing of who knows what on the board. This
understanding of expertise location among group
members is particularly important for groups in
which members’ special expertise or unique past
Strat. Mgmt. J., 32: 731–747 (2011)
DOI: 10.1002/smj

experiences provide some members with access to
information that others do not have (Rulke and
Rau, 2000), and it has been found to have posi-
tive effects on group task performance (Littlepage,
Robison, and Reddington, 1997). Research shows
that co-working experience allows group members
to recognize, share, and coordinate their individual
experience (Littlepage et al., 1997). In a similar
vein, directors who share long co-working expe-
rience are likely to develop a group-level mutual
knowledge based on their firsthand understanding
of one another’s expertise and through the face-
to-face interactional dynamics among themselves
(Cramton, 2001). Equipped with firm-specific busi-
ness knowledge and group-specific knowledge of
who knows what, directors should be able to spend
less time searching for necessary decision infor-
mation and focus more on discussing substantive
issues. Taken together, these arguments lead to our
third hypothesis:
Hypothesis 3: There will be a positive relation-
ship between independent board members’ co-
working experience and investor reactions to a
new CEO appointment.
External social capital and external directorship
ties
The board’s network of external directorship ties is
a major source of its external social capital (Hill-
man and Dalziel, 2003). Broader work on inter-
locking directorates has shown that ties play an
important role in the dissemination of knowledge
between firms (Burt, 1980). Such ties reduce scan-
ning costs (Bazerman and Schoorman, 1983) and
increase access to strategic information and oppor-
tunities (Pfeffer, 1991), which perhaps explains
why the market responds positively when a CEO
is asked to join another firm as a board member
(Rosenstein and Wyatt, 1994).
In the process of searching for a new CEO,
the board may benefit from independent directors’
experience of serving on other corporate boards.
In other words, who board members know affects
the quality of CEO candidate information avail-
able to the focal board. Through their commu-
nication with other directors and executives, the
focal firm’s directors quite likely obtain valuable
and up-to-date information about a broad pool
of potential candidates. CEO hiring decisions are
often ‘secretive,’ so candidate information from
Copyright  2010 John Wiley & Sons, Ltd.
10970266, 2011, 7, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/smj.909 by Indian Institute Of Management, Wiley Online Library on [29/09/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Board Capital and CEO Selection 735
an authoritative and trusted source (such as direc-
tors in other companies) is a valuable resource.
Independent directors’ external board ties serve
as a window to the world (Andrews, 1980). In
previous studies, external directorship ties have
been variously viewed as a source of information,
experience, and reputation (Carpenter and West-
phal, 2001; Hillman, Cannella, and Paetzold, 2000;
Perry and Peyer, 2005). Executives’ decisions to
sit on other corporate boards increase the value
of the executives’ home firm, indicating that the
stock market values the external board seats earned
by executives (Perry and Peyer, 2005). Similarly,
Carpenter and Westphal (2001) found that direc-
tors who held board seats in strategically related
firms were more effective in strategic decision
making for similar firms than directors without
such network ties. Their findings are consistent
with the argument that director ties are associated
with improving the flow of information to the focal
firm.
In addition, external directorship ties may pro-
vide the board with expertise in evaluating CEO
performance and hence an ‘alternative angle’ re-
garding what should be required of the new
CEO. While board CEO experience provides a
jobholder’s perspective and increases the board’s
understanding of the CEO’s job, expertise in
assessing CEO performance provides an evalua-
tor’s perspective and increases the board’s abil-
ity to set up performance standards and evalua-
tion criteria for the CEO. Directors with external
board ties are more likely to learn the expertise
of assessing CEO performance and thereby make
positive contributions to the CEO selection deci-
sion. These well-connected directors would know
more about evaluating a CEO’s ability in strat-
egy formulation and implementation and about
establishing appropriate performance metrics for
the CEO (Conger et al., 1998). CEO evaluation
is a task that cannot be delegated (Charan, 2005)
and expertise in this task is valuable, rare, and
hard-to-substitute because in most companies only
board members have the authority and the data to
evaluate the CEO (Conger et al., 1998). Last but
not least, the market for directorships functions as
an important source of incentives for independent
directors to develop their professional reputation
(Fama and Jensen, 1983). Not surprisingly, the
number of external directorships has been linked
to director reputation as perceived by investors
Strat. Mgmt. J., 32: 731–747 (2011)
DOI: 10.1002/smj

736 J. Tian, J. Haleblian, and N. Rajagopalan
(Ferris, Jagannathan, and Pritchard, 2003). Over-
all, external directorship ties are associated with
high quality information about external CEO can-
didates, unique expertise in CEO evaluation, and
good director reputation. Based on these observa-
tions, we propose our fourth hypothesis:
Hypothesis 4: There will be a positive rela-
tionship between independent board members’
external directorship ties and investor reactions
to a new CEO appointment.
Interaction effect of board social capital
and succession type
The board is faced with a challenge in the process
of hiring a new CEO: identifying and evaluating
potential CEO candidates from both inside and
outside the firm (Charan, 2005; Conger, Lawler,
and Finegold, 2001; Vancil, 1987). We posit that
while board human capital will likely have a ben-
eficial effect for both internal and external succes-
sions, board social capital will have a differential
effect depending on the succession type. Recall
that human capital is captured by the board mem-
ber’s prior CEO experience and industry expe-
rience. These types of experience are valuable
whether the newly selected CEO is an insider or an
outsider because in both types of successions the
board needs to understand the nuances of a CEO’s
job (an understanding that is derived from the
board’s CEO experience) as well as key industry
contingencies that affect the fit between a potential
CEO candidate and the firm (industry understand-
ing is enhanced by the board members’ industry
experience). In contrast, the value of social capi-
tal is more likely to be contingent on the type of
succession. Specifically, we argue that boards with
greater internal social capital make better internal
CEO selection decisions, while boards with supe-
rior external social capital make better external
CEO selection decisions.
On the one hand, we expect that internal social
capital in the form of co-working experience will
have a greater positive effect on internal CEO
selections than external ones. Companies choose
internal promotion or external recruitment for dif-
ferent reasons. Internal promotion is associated
with the objective of protecting the company’s
current resource base and maintaining strategic sta-
bility, whereas external recruitment is used for
the purpose of renewing resources and initiating
Copyright  2010 John Wiley & Sons, Ltd.
10970266, 2011, 7, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/smj.909 by Indian Institute Of Management, Wiley Online Library on [29/09/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
strategic change (Kesner and Dalton, 1994; Vancil,
1987). Investors may prefer the internal promo-
tion decisions made by boards with strong internal
social capital because the directors tend to under-
stand the firm’s strategic issues better and are more
familiar with potential inside candidates.
On the other hand, we expect that external
social capital will be more beneficial for external
CEO selections. Arguably, access to superior infor-
mation on external CEO candidates is enhanced
by directors’ ties with other corporate boards.
Research shows external directorship ties provide
reliable, detailed, and timely information to the
board (Carpenter and Westphal, 2001) and help
reduce the costs of searching for external CEO can-
didate information (Williamson and Cable, 2003).
Although firms often hire an executive search firm
when initiating a CEO search, researchers have
found that, in most successful CEO searches, it
is the board of directors rather than headhunters
that produces the list of primary candidates (Lorsch
and Khurana, 1999). While search firms excel at
verifying qualifications and references, the data
they offer may lack details about a candidate’s
working style, cultural values, or accomplishments
(Khurana, 2001). Directors’ connections to exter-
nal boards allow them to get fine-grained infor-
mation on external candidates as evidenced by the
following quote:
‘To get such fine-grained information on
external candidates, directors rely largely on
their connections to other directors. Since a
large number of CEO candidates are them-
selves on boards, they are often connected
to other board members. These connections,
in turn, make the interlocking directorate
particularly well suited for transferring spe-
cific information about potential candidates’
(Khurana, 2004: 114–115).
Overall, boards with rich internal social capital
are better at finding an internal CEO successor
whereas boards with rich external social capital are
better at matching firm requirements to an external
CEO successor. Different types of board social
capital thus provide different benefits in different
succession contexts. These arguments lead to the
following hypotheses:
Hypothesis 5a: The positive effect of board co-
working experience (i.e., internal social capital)
Strat. Mgmt. J., 32: 731–747 (2011)
DOI: 10.1002/smj

on investor reaction to a new CEO appointment
will be stronger for internal than for external
CEO successions.
Hypothesis 5b: The positive effect of external
directorship ties (i.e., external social capital) on
investor reactions to a new CEO appointment
will be stronger for external than for internal
CEO successions.
METHODS
Sample selection
The sample for this study consisted of new CEO
appointment announcements made between 1 Jan-
uary, 1999, and 31 December, 2003, by large
(average sales revenue greater than $50 million in
the three-year period prior to CEO succession),
nondiversified (over 70% of annual sales from
a single industry in the three-year period prior
to CEO succession), publicly traded U.S. manu-
facturing firms. The term ‘industry’ was defined
using the four-digit Standard Industrial Classifi-
cation (SIC) codes based on the segment data
provided in COMPUSTAT. To filter out events of
little importance, we limited our sample to per-
manent appointments (Furtado and Rozeff, 1987).
Consistent with prior research, we identified the
announcements from the Wall Street Journal ’s
(WSJ ) ‘Who’s News’ and ‘What’s News’ columns
(Friedman and Singh, 1989; Furtado and Rozeff,
1987). The initial sample included 316 announce-
ments made by 295 companies. After dropping
cases with missing data, our final sample consisted
of 208 CEO succession events. We compared the
firms in our final sample against firms dropped
for missing data on total assets, total sales, or
employment size. Based on z-tests for differences
in means, no significant differences were found
between groups, indicating that selection bias was
not a problem in our sample.
Measures
Dependent variable
Abnormal stock return refers to the difference
between the observed return and the predicted
or normal return for the firm’s stock around the
appointment of the new CEO. Thus, the impact of
the event was measured by the portion of the return
Copyright  2010 John Wiley & Sons, Ltd.
10970266, 2011, 7, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/smj.909 by Indian Institute Of Management, Wiley Online Library on [29/09/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Board Capital and CEO Selection 737
that is unanticipated by an economic model of
anticipated, normal returns. This may be expressed
mathematically as:
E = Rit − (αi + βi Rmt ),
where Rit = return on stock i for day t, Rmt =
return on the market portfolio for day t, αi = a
constant, and βi = beta of stock i. To estimate α
and β, we used an estimation period of 250 days,
or approximately one year of trading days, from
295 days to 45 days before the event. Short event
windows have the advantage of limiting possi-
ble confounding effects (McWilliams and Siegel,
1997), so the dependent variable in this study
was measured as the cumulative abnormal return
(CAR) over the two-day window (0,1) around the
announcement date of CEO appointment.
To ensure that abnormal returns reflect the mar-
ket’s reaction to the new CEO appointment, we
identified the day on which the CEO selection
news was first known to the public by compar-
ing the publication date of the WSJ to the date of
the hiring company’s own press release and choos-
ing the earlier of the two as the event date. We
found 17 sample firms had announced a succession
plan and named the successor before the official
appointment of the successor. Hence, we assigned
these cases a new (more accurate) event date—the
day when the succession plan was announced.
Independent variables
All board experience and external directorship ties
variables were created for year t-1, treating the
year in which the new CEO was appointed as
t, and they were measured only for the indepen-
dent directors of the focal firm. We coded data
on board-related variables from the sample firms’
proxy statements filed in year t-1. Corporate gov-
ernance researchers have classified directors into
three groups: inside, affiliated, and independent
(Daily, Johnson, and Dalton, 1999). We coded a
director as an insider if he or she was a current
employee of the focal firm. An affiliated director
was defined as being one or more of the following:
a former employee, a service provider, a supplier,
a customer, a recipient of charitable funds con-
tributed by the firm, an interlocking or designated
director, and/or a family member of a director or
an executive. Finally, we coded a director as inde-
pendent if he or she was an outside director not
Strat. Mgmt. J., 32: 731–747 (2011)
DOI: 10.1002/smj

738 J. Tian, J. Haleblian, and N. Rajagopalan
affiliated with the company in any of the capacities
listed above.
Board human capital was measured with two
variables—board CEO experience and board in-
dustry experience. We first identified the name of
each independent director’s current employer—or
most recent employer if the director was retired—
as well as his or her job title(s) with the employer.
A ‘CEO director’ was defined as an indepen-
dent director who currently was, or previously had
been, the CEO of another firm. Board CEO expe-
rience was then measured as the percentage of
independent board members who were CEO direc-
tors (Fich, 2005). Consistent with prior work (e.g.,
Kroll et al., 2008), board industry experience was
measured as a dichotomous variable (= 1 if one
or more independent directors had current or past
work experience in the same industry as the focal
firm, and = 0 if no independent director had cur-
rent or past experience in the same industry).
We defined internal social capital in terms of the
board’s co-working experience. Consistent with
previous research (Barkema and Shvyrkov, 2007;
Carroll and Harrison, 1998), board co-working
experience was calculated as the overlap in inde-
pendent directors’ board tenures based on the fol-
lowing formula:
Board co − working experience =
1

tenure overlap = min(ui uj ),
n i=j
where ui is the board tenure of the i th director
and n is the number of pairwise comparisons.
Finally, board external social capital was defined
as external directorship ties, and consistent with
prior studies (e.g., Ferris et al., 2003; Fich, 2005;
Mitra and Hossain, 2007), measured as the average
number of external directorship ties held by the
independent directors of the focal firm.
Control variables
To rule out confounding explanations, we incorpo-
rated a set of control variables for outgoing (old)
and incoming (new) CEO characteristics, succes-
sion context, board independence, board experi-
ence diversity, and the organizational and industry
contexts.
CEO characteristics and succession context. Age
is a proxy for a CEO’s experience and career
Copyright  2010 John Wiley & Sons, Ltd.
10970266, 2011, 7, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/smj.909 by Indian Institute Of Management, Wiley Online Library on [29/09/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
expectations (Cannella and Shen, 2001). There-
fore, we controlled for the old CEO’s and the
new CEO’s ages. Because the new CEO’s char-
acteristics may affect investors’ expectations for
future firm value, we added in the model several
variables measuring the characteristics of the new
CEO. New CEO origin was coded ‘1’ if the new
CEO was an insider and ‘0’ if he or she was an
outsider (Zhang and Rajagopalan, 2004). We also
controlled for three variables measuring the new
CEO’s human and social capital. The first vari-
able is the number of external directorships held
by the new CEO. The second is the new CEO’s
job experience, coded ‘1’ if the new CEO held the
CEO title at his or her previous employing firm
(when the new CEO was an outsider) or if the
new CEO held the title of president, chief operat-
ing officer (COO), or both (when the new CEO was
an insider, or more specifically, an heir apparent
to the CEO position) (Shen and Cannella, 2003;
Zhang and Rajagopalan, 2004), and ‘0’ if other-
wise. This variable shows whether or not the new
CEO had previous exposure to tasks specific to the
CEO position. The third is the new CEO’s indus-
try experience, coded ‘1’ if the new CEO had had
work experience in the focal firm’s primary indus-
try. Next, we followed previous work (Cannella
and Lubatkin, 1993; Huson, Malatesta, and Par-
rino, 2004) and controlled for old CEO disposition,
in which ‘1’ represents routine departures and ‘0’
represents nonroutine departures. Routine depar-
tures included (1) relay successions, in which an
heir apparent became CEO and the outgoing CEO
became board chairperson, and (2) retirement, in
which the outgoing CEO retired but remained as
the chairperson or a director. Nonroutine depar-
tures included (1) voluntary resignation, (2) forced
resignation and dismissal, and (3) death or health
problems. Characteristics of the arriving/departing
CEOs and succession events were coded from the
WSJ, company press releases, and corporate proxy
statements.
Board independence. We controlled for outsider
ratio, the most widely used measure of board inde-
pendence (Zahra and Pearce, 1989). This variable
was computed as the proportion of independent
outside directors on the board. The departing CEO
may also influence the choice of successor. For
example, some independent directors are likely to
have been handpicked by the old CEO (Shivdasani
and Yermack, 1999), and as such they may be less
Strat. Mgmt. J., 32: 731–747 (2011)
DOI: 10.1002/smj

influential over the selection of a new CEO than
directors who joined the board prior to the old
CEO. For that reason, we controlled for the per-
centage of independent directors joining the board
after the old CEO. The effect of inside directors’
experience on board performance may also be rel-
evant in this context. Some researchers argue that
insiders contribute to board performance by virtue
of their firm-specific knowledge (Baysinger and
Hoskisson, 1990), whereas others posit that insid-
ers use information for their own interests rather
than for the benefit of shareholders (Weisbach,
1988). To control for the effect of insiders’ expe-
rience, we incorporated insiders’ average board
tenure into the analysis. Independent directors with
a financial stake in the firm may be more moti-
vated to monitor firm management (e.g., Hambrick
and Jackson, 2000), so we controlled for direc-
tor stock ownership, measured as the percentage
of shares outstanding owned by all independent
directors.
Organizational and industry context. Three firm-
level controls were included. Because investors
may respond differentially to CEO successions in
large and small firms (Furtado and Rozeff, 1987),
we controlled for firm size, measured as the loga-
rithm of the firm’s total assets averaged over the
three years prior to CEO selection. Pre-succession
performance has also been regarded as an impor-
tant contingency in CEO succession research. Fol-
lowing previous research (Zhang and Rajagopalan,
2004), we created a composite index of prior firm
performance by standardizing the market-to-book-
value ratio and return on equity (ROE) for the year
prior to CEO succession (mean = 0, s.d. = 1)
and then summing the two standardized values.
We also controlled for prior industry performance,
which was operationalized as the median firm per-
formance—also computed as a composite mea-
sure of market-to-book value and ROE—in the
focal firm’s primary industry. Data on the size and
performance variables were obtained from COM-
PUSTAT. Finally, consistent with prior work, we
controlled for industry instability (Boyd, 1990).
We regressed time against industry sales using
the following equation for each four-digit SIC
industry:
Yt = b0 + b1 × t + εt ,
where Yt is the total sales of all firms in an
industry in year t, and εt is the residual. Industry
Copyright  2010 John Wiley & Sons, Ltd.
10970266, 2011, 7, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/smj.909 by Indian Institute Of Management, Wiley Online Library on [29/09/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Board Capital and CEO Selection 739
instability was then computed as the standard error
of the estimated beta coefficient (b1 ) divided by
sales averaged over the five-year period prior to
the year of CEO succession (from year t-5 to t-
1). Data on these variables were obtained from
COMPUSTAT.
Board experience diversity. The broader literature
on top management teams and boards has argued
that both the level and the diversity of experi-
ence may be relevant in examining group/firm out-
comes. However, the empirical evidence about the
relation between experience diversity and group
performance has been mixed (Milliken and Mar-
tins, 1996). In this study, we incorporated four
diversity measures. Board CEO experience diver-
sity was measured using the formula developed
1  (S −
n
by Tsui, Egan, and O’Reilly (1992): [ n i
 j =1
Sj )2 ]1 2 . It is the square root of the summed
squared differences between a director Si ’s CEO
tenure and the CEO tenure of every other direc-
tor Sj , divided by the number of independent
directors. Board co-working experience diversity
was measured in the same way except that Si
and Sj represented directors’ board tenures. We
controlled for board industry experience diver-
sity based on the measure used by Cannella,
Park, and Lee (2008). We checked each indepen-
dent director’s primary or most recent employer
and recorded the number of industries in which
that company had operations from the business
segment data of COMPUSTAT. Board industry
experience diversity was then measured using the
n m
following formula: [ (1 − pij2 )]/n, where pij
i=1 j =1
equals the reciprocal of the number of indus-
tries (i.e., 1 divided by the number of indus-
tries in which a director’s primary or most recent
employer operated), m is the number of indus-
tries, and n is the number of independent direc-
tors. A higher score represents greater industry
experience diversity. While these three diversity
measures address the board’s human capital and
internal social capital, the effect of diversity may
also be reflected in the number of industries to
which the board is linked through directors’ exter-
nal board ties. Therefore, we added another con-
trol variable, industry diversity of external direc-
torship ties, measured as the number of two-digit
SIC industries represented in the board’s external
Strat. Mgmt. J., 32: 731–747 (2011)
DOI: 10.1002/smj

740 J. Tian, J. Haleblian, and N. Rajagopalan
directorship ties divided by the total number of
external ties.2
RESULTS
Table 1 provides descriptive statistics and cor-
relations for the variables used in the study.
Table 2 reports the results of ordinary least squares
(OLS) regression analysis for CAR (0, 1).3 Model
1 included the control variables only. Model 2
added the four board capital variables to Model
1. Model 3 added to Model 2 the two interaction
terms between new CEO origin and (a) board co-
working experience and (b) external directorship
ties. Results from Model 3 were used to test the
hypotheses.
The independent variables were mean-centered
prior to creating the interaction terms to address
the issue of potential multicolinearity between the
main effects and the interaction terms (Aiken and
West, 1991). We inspected the values of vari-
ance inflation factors (VIF) to assess our data for
multicolinearity. The VIF values ranged between
1.06 and 2.05 for the variables in our regressions
models, which is much lower than the commonly
accepted threshold value of 10 (Hair et al., 1998)
and demonstrates that multicolinearity is not a
problem in our data.
Hypothesis 1 predicted a positive effect of board
CEO experience on the stock market reaction to
a new CEO appointment. Consistent with this
hypothesis, the regression coefficient in Model 3
for board CEO experience is positive and signifi-
cant (b = 4.23, p < 0.05). Hypothesis 2 predicted
a positive relation between board industry experi-
ence and investor reaction to a new CEO appoint-
ment. The regression coefficient for board industry
experience is positive and significant, supporting
Hypothesis 2 (b = 2.62, p < 0.05). Hypothesis 3
predicted that board co-working experience should
be positively related to CAR. The regression
coefficient for co-working experience provides
2
Of the firms in our sample, 60 percent did not have any external
directorship ties with other companies in their own two-digit
SIC industry, and 89 percent of firms did not have any external
directorship ties with other companies in their own four-digit
industry.
3
To assess the sensitivity of our findings, we also ran our
analyses using (0, 2) and (0, 3) windows. We were able to
replicate our findings using these additional windows, and these
results are available upon request.
Copyright  2010 John Wiley & Sons, Ltd.
10970266, 2011, 7, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/smj.909 by Indian Institute Of Management, Wiley Online Library on [29/09/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
strong support for Hypothesis 34 (b = 0.94,
p < 0.001). Consistent with Hypothesis 4, the
coefficient for directors’ external directorship ties
shows a positive effect on CAR (b = 0.93,
p < 0.05). The four independent variables as a
group explain a significant proportion of the vari-
ance of the dependent variable. Compared with
Model 1, the incremental variance explained by
Model 2 is 13 percent (p < 0.001). These results
support our theoretical premise that each of the
four variables representing a different element of
board human and social capital has a distinct
impact on the stock market reactions to new CEO
appointment.
Hypotheses 5a and 5b predicted moderating
effects of new CEO origin on the relationships
between board co-working experience, external
directorship ties, and CAR, respectively. The coef-
ficient for the interaction between board co-
working experience and new CEO origin is positive
and significant (b = 0.80, p < 0.05); therefore,
the result supports Hypothesis 5a. Moreover, con-
sistent with Hypothesis 5b, the interaction term
between external directorship ties and new CEO
origin is negative (b = −1.50, p < 0.10). But
the marginal significance of the interaction term
provides only limited support for Hypothesis 5b.
To further facilitate interpretation, we plotted
the significant two-way interaction effect for co-
working experience in Figure 1. All variables
except the relevant independent variables were
constrained to their sample means. Following
Aiken and West (1991), we calculated the two
simple slopes related to the interaction effect. The
simple slopes refer to the regression coefficients
of board co-working experience for insider succes-
sions and outsider successions, respectively. Con-
sistent with Hypothesis 5a, in events in which the
new CEO was hired from outside the firm, the
simple slope for board co-working experience was
not significant (b = 0.57, n. s.), while the slope
was positive and significant in insider succession
events (b = 1.33, p < 0.001). Investors appeared
4
Previous work on ‘groupthink’ (Janis, 1972) suggests that
shared group experience beyond a certain level may lead to
suboptimal decisions. Hence, groupthink would be consistent
with a nonlinear relationship between co-working experience
and board effectiveness. To test for this possibility, we included
a squared term for co-working experience in supplementary
analysis, but we found no significant effect. Perhaps because
boards meet less frequently and for shorter time periods than
other groups within organizations (e.g., top management teams),
they are less susceptible to groupthink.
Strat. Mgmt. J., 32: 731–747 (2011)
DOI: 10.1002/smj
 Table 1. Mean, standard deviation, and correlations

Mean s.d. 1 2 3 4 5 6 7 8 9 10

1 CAR (0,1) 0.01 0.08

2 Old CEO age 58.41 7.42 −0.15∗
3 New CEO age 50.17 6.82 −0.20∗∗ 0.11†
4 New CEO origin 0.58 0.50 −0.09 0.13† 0.01
5 New CEO external directorships 0.74 1.28 −0.05 −0.03 0.28∗∗∗ −0.14∗
6 New CEO job experience 0.52 0.50 −0.06 0.15∗ 0.00 0.32∗∗∗ −0.14∗
7 New CEO industry experience 0.66 0.47 −0.12† 0.18∗∗ −0.08 0.62∗∗∗ −0.08 0.11
8 Old CEO disposition 0.77 0.42 0.13† 0.26∗∗∗ −0.21∗∗ 0.09 −0.14∗ 0.12† 0.11
9 Outsider ratio 0.62 0.18 −0.13† 0.08 0.13∗ 0.00 0.10 0.05 −0.01 −0.01

Copyright  2010 John Wiley & Sons, Ltd.

10 % directors joining board after the old CEO 0.49 0.39 0.07 0.13∗ −0.12† −0.03 −0.06 0.07 0.05 0.26∗∗∗ 0.12†
11 Insiders’ average board tenure 8.63 5.90 −0.09 0.22∗∗ −0.10 0.11 −0.15∗ 0.03 0.09 0.15∗ −0.10 0.25∗∗∗
12 Director stock ownership 0.19 0.98 −0.05 −0.09 0.01 −0.10 0.09 −0.03 −0.08 −0.01 0.04 −0.01
13 Firm size 6.76 1.86 0.02 0.15∗ 0.13∗ 0.13∗ 0.31∗∗∗ 0.01 0.00 0.01 0.16∗ −0.14∗
14 Prior firm performance 0.01 1.04 0.04 0.01 −0.09 −0.12† 0.00 −0.11† −0.05 0.02 −0.04 −0.14∗
15 Prior industry performance 0.03 1.20 −0.11† 0.03 0.02 −0.02 0.00 0.11† 0.00 0.00 0.07 0.06
16 Industry instability 3.82 3.07 0.14∗ 0.20∗∗ 0.09 −0.13† 0.09 −0.10 −0.15∗ 0.09 0.08 0.05
17 Board CEO experience diversity 8.12 5.84 0.07 0.04 0.07 0.05 0.10 0.00 −0.04 −0.12† 0.13∗ −0.01
18 Board industry experience diversity 0.17 0.29 0.04 −0.05 −0.08 −0.01 0.05 0.02 −0.01 0.08 0.21∗∗ 0.11
19 Board co-working experience diversity 10.79 8.24 −0.12† 0.31∗∗∗ 0.02 0.17∗∗ 0.02 0.13† 0.05 0.09 0.28∗∗∗ −0.06
20 Industry diversity of external ties 0.77 0.96 0.02 0.02 −0.03 −0.03 0.00 0.03 −0.01 −0.02 −0.29∗∗∗ −0.02
21 Board CEO experience 0.32 0.24 0.13† −0.06 0.06 −0.03 0.17∗ −0.04 −0.01 0.00 0.17∗ −0.10
22 Board industry experience 0.24 0.43 0.08 −0.16∗ −0.01 −0.03 −0.03 0.03 −0.01 0.03 0.19∗∗ 0.03
23 Board co-working experience 4.22 2.78 0.18∗∗ 0.26∗∗∗ 0.01 0.14∗ −0.09 0.10 0.10 0.15∗ −0.01 −0.06
24 Board external directorship ties 2.53 0.96 0.11 −0.08 0.11 0.04 0.12† 0.00 −0.07 0.01 0.12† −0.03

11 12 13 14 15 16 17 18 19 20 21 22 23

11 Insiders’ average board tenure

12 Director stock ownership −0.02
13 Firm size −0.08 −0.23∗∗∗
14 Prior firm performance −0.11† −0.09 0.09
15 Prior industry performance 0.03 −0.04 0.09 .02
16 Industry instability −0.05 −0.09 0.01 .02 −0.09
17 Board CEO experience diversity 0.03 0.09 0.09 .00 0.09 0.02
18 Board industry experience diversity −0.11 0.00 0.08 −.01 −0.08 0.15∗ −0.10
19 Board co-working experience diversity 0.26∗∗∗ −0.05 0.35∗∗∗ .05 0.05 0.03 0.04 −0.01
20 Industry diversity of external ties 0.10 −0.05 −0.15∗ .00 0.03 0.11 −0.05 −0.10 −0.02
21 Board CEO experience −0.25∗∗∗ −0.01 0.29∗∗∗ .10 0.00 0.06 0.02 −0.02 0.03 −0.11
22 Board industry experience −0.14∗ 0.11 −0.05 −.12† 0.13∗ −0.06 −0.13† 0.10 −0.06 −0.05 0.01
Board Capital and CEO Selection

23 Board co-working experience 0.29∗∗∗ 0.01 0.04 .08 0.06 0.01 0.08 −0.07 0.27∗∗∗ −0.04 −0.14∗ −0.07
24 Board external directorship ties −0.08 −0.02 0.22∗∗∗ −.12† 0.02 −0.03 0.05 0.00 −0.01 −0.32∗∗∗ 0.03 −0.01 −0.01

∗∗ ∗∗∗
N = 208. † p < 0.10; ∗ p < 0.05; p < 0.01; p < 0.001.

Strat. Mgmt. J., 32: 731–747 (2011)

741

DOI: 10.1002/smj
10970266, 2011, 7, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/smj.909 by Indian Institute Of Management, Wiley Online Library on [29/09/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
 10970266, 2011, 7, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/smj.909 by Indian Institute Of Management, Wiley Online Library on [29/09/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
742 J. Tian, J. Haleblian, and N. Rajagopalan
Table 2. Effects of board human and social capital on investor reactions to new CEO selectiona

Model 1 Model 2 Model 3

B s.e. B s.e. B s.e.

(Constant) 17.89∗∗ (6.18) 14.03∗ (5.98) 21.34∗∗∗ (6.02)

Old CEO age −0.19∗ (0.09) −0.18∗ (0.08) −0.18∗ (0.08)
New CEO age −0.20∗∗ (0.08) −0.23∗∗ (0.08) −0.24∗∗ (0.08)
New CEO origin −0.29 (1.48) −0.16 (1.38) −0.01 (1.37)
New CEO external directorships −0.43 (0.46) −0.43 (0.43) −0.46 (0.42)
New CEO job experience −0.65 (1.15) −1.35 (1.08) −1.77† (1.10)
New CEO industry experience −1.26 (1.44) −1.50 (1.35) −1.51 (1.34)
Old CEO disposition 2.14† (1.37) 0.90 (1.30) 0.57 (1.29)
Outsider ratio −3.33 (3.48) −4.89† (3.31) −4.87† (3.29)
% directors joining board later than old CEO 2.16† (1.54) 3.30∗ (1.46) 2.97∗ (1.46)
Insiders’ average board tenure −0.14† (0.10) −0.22∗ (0.10) −0.23∗ (0.10)
Director stock ownership −0.24 (0.57) −0.45 (0.53) −0.56 (0.53)
Firm size 0.71∗ (0.35) 0.45† (0.34) 0.49† (0.34)
Prior firm performance −0.03 (0.50) −0.15 (0.48) 0.00 (0.48)
Prior industry performance −0.48 (0.44) −0.72∗ (0.42) −0.73∗ (0.42)
Industry instability 0.30† (0.18) 0.30∗ (0.17) 0.31∗ (0.17)
Board CEO experience diversity 0.18∗ (0.09) 0.18∗ (0.08) 0.20∗∗ (0.08)
Board industry experience diversity −0.17 (1.88) 0.38 (1.77) 0.19 (1.76)
Board co-working experience diversity −0.07 (0.08) −0.10† (0.07) −0.09 (0.07)
Industry diversity of external ties 0.25 (0.58) 0.77† (0.57) 0.82† (0.56)
Board CEO experience 4.56∗ (2.23) 4.23∗ (2.22)
Board industry experience 2.50∗ (1.18) 2.62∗ (1.17)
Board co-working experience 1.05∗∗∗ (0.22) 0.94∗∗∗ (0.22)
Board external directorship ties 0.95∗ (0.53) 0.93∗ (0.53)
New CEO origin X Board co-working experience 0.80∗ (0.44)
New CEO origin X Board external directorship ties −1.50† (1.01)
R squared 0.17 0.30 0.32
R squared change 0.13∗∗∗ b 0.02†c

a.
Values are unstandardized regression coefficients, with standard errors in parentheses. Coefficients and standard errors are multiplied
by 100 to facilitate interpretation.
b.
Relative to Model 1.
c.
Relative to Model 2. † p < 0.10; ∗ p < 0.05; ∗∗ p < 0.01; ∗∗∗ p < 0.001. N = 208. All are one-tailed t tests.

0.16

0.14

0.12

0.1
CAR (0,1)

0.08

0.06

0.04

0.02

0
Low High
Board co-working experience

Outsider succession
Insider succession

Figure 1. Interaction effect of board co-working experience and new CEO origin

Copyright  2010 John Wiley & Sons, Ltd. Strat. Mgmt. J., 32: 731–747 (2011)
DOI: 10.1002/smj

to evaluate board co-working experience more
positively when the new CEO was promoted from
within.
DISCUSSION
This is, to the best of our knowledge, the first
empirical paper providing evidence that board cap-
ital influences investor reactions to new CEO
selection. Board capital theory suggests that board
human capital comprises director experience and
expertise, while board social capital consists of the
resources available to the board through its net-
work of relationships (Hillman and Dalziel, 2003).
Because hiring the CEO is widely accepted as
the board’s most important decision, and one in
which the board is more directly involved than in
any other (Vancil, 1987), we chose to examine the
effect of board capital on board effectiveness in
this highly relevant decision context.
Our study refines the agency theory-based sug-
gestion that firms should select independent board
members (Weisbach, 1988). Prior work on boards
shows that board motivation associated with high
structural independence may not be sufficient to
ensure board effectiveness (Johnson et al., 1996).
Our findings provide empirical credibility to this
suggestion and clearly highlight the importance of
selecting independent board members with rele-
vant board capital. This study shows that the abil-
ity of independent directors in the form of board
capital is valued by the market upon the firm’s
announcement of appointing a new CEO. These
results are consistent with the idea that both board
motivation and ability are necessary for under-
standing board effectiveness. These findings par-
allel other work that has shown that ability is a
critical determinant of task performance (Hunter
and Hunter, 1984).
Emerging research on board human capital has
shown that directors’ human capital, measured
as strategic experience in their home compa-
nies, significantly influences the strategic changes
observed in the firms where they serve on the board
(Westphal and Fredrickson, 2001). Also, directors’
human capital in the form of prior acquisition-
related experience impacts a focal firm’s acquisi-
tion outcomes (Kroll et al., 2008; McDonald et al.,
2008). Consistent with these studies, our find-
ings suggest that board human capital matters.
We found that both CEO experience and industry
Copyright  2010 John Wiley & Sons, Ltd.
10970266, 2011, 7, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/smj.909 by Indian Institute Of Management, Wiley Online Library on [29/09/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Board Capital and CEO Selection 743
experience of independent directors were posi-
tively related to investor reactions to new CEO
selection. Our study further examined the role of
board social capital in determining board effec-
tiveness in CEO selection. By drawing a distinc-
tion between internal and external social capital,
we were able to examine both direct and relative
effects of these two types of social capital. We
found evidence supporting the direct effect argu-
ment as stock market investors responded favor-
ably to CEO hiring decisions made by boards with
high levels of internal and external social capital.
This evidence, combined with the effect of board
human capital, suggests that board capital does
explain a significant portion of board effectiveness
in CEO selection as perceived by the market.
We then investigated if the two types of board
social capital affect investor reactions differently
depending on where the new CEO comes from.
The new CEO’s origin (insider or outsider) is an
important contextual factor not only because it
is expected to influence the firm’s future strate-
gic direction (Vancil, 1987) but also because prior
research on the link between CEO origin and stock
market reaction to CEO appointment has not been
conclusive (Kesner and Sebora, 1994). An impli-
cation is that investors may look for firm value-
enhancing factors other than CEO origin. In this
study, we found some evidence that investor reac-
tions might be affected by different ‘combinations’
of new CEO origin and the hiring board’s social
capital. In particular, investors reacted most posi-
tively to internal promotions made by boards with
high levels of internal social capital. While this is
the first study of which we are aware that demon-
strates the importance of board internal social cap-
ital (in the form of board co-working experience),
the underlying logic for why internal social capi-
tal is crucial to group performance can be found
in prior classic management work (e.g., Penrose,
1959). Board members with long co-working expe-
rience, by virtue of their tacit knowledge about one
another’s expertise, the board, and the firm, are
able to provide resources that cannot be provided
by directors who have little time to get familiar
with their job and with one another.
In sum, our study suggests that boards should
ensure that the ‘experience profiles’ of indepen-
dent directors meet the ability requirements of
various board tasks, so that the board can have
‘the right information in the right format at the
right time’ (Charan, 2005: 47). CEO experience
Strat. Mgmt. J., 32: 731–747 (2011)
DOI: 10.1002/smj

744 J. Tian, J. Haleblian, and N. Rajagopalan
is regarded as an important source of business
expertise (Bianco and Bryrne, 1997; Hillman et al.,
2000) and likely benefits a wide range of board
decisions. In contrast, industry experience may be
more context-specific and is likely more important
for nondiversified companies than for diversified
companies. In addition, the strong positive effect
of board co-working experience implies the impor-
tance of maintaining board stability and hence its
ability to develop internal social capital. Finally,
firms may be better able to obtain valuable strate-
gic information from the external environment if
they recruit independent directors with more direc-
torship ties with other companies, which, among
other benefits, may allow them to access a broader
pool of qualified candidates.
This study tested a comprehensive model of
board effectiveness in CEO selection. We found
significant effects of board capital variables on
investor reactions to new CEO appointments even
after we controlled for the effects of individual-,
board-, organizational-, and industry-level factors.
In particular, while one may argue that investors
would focus more on the new CEO’s characteris-
tics when evaluating the performance implications
of CEO succession, our findings show that board
capital matters more than the new CEO’s char-
acteristics. When the characteristics of the new
CEO (age, origin, prior job and industry experi-
ence, and external director ties), were added to a
baseline model that included all the other control
variables, they increased the model’s explanatory
power by four percent (incremental R-square =
4%). In comparison, when the four board capital
variables were added to the same baseline model,
R-squared increased by 11 percent. These results
suggest that, at least in our sample, investors val-
ued the board’s human and social capital more
than information about the new CEO. While our
findings may be somewhat surprising, it is consis-
tent with prior empirical research that has shown
a rather weak relationship between the character-
istics of the new CEO and firm performance (e.g.,
Datta and Rajagopalan, 1998).
We also acknowledge our study’s limitations and
suggest ways in which future research can address
these shortcomings. First, we used straightforward
measures of board capital variables from publicly
available data. Arguably, our context-specific mea-
sures are more informative than previously used
‘rough’ proxies for board composition (e.g., inside
vs. outside directors). However, our measures still
Copyright  2010 John Wiley & Sons, Ltd.
10970266, 2011, 7, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/smj.909 by Indian Institute Of Management, Wiley Online Library on [29/09/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
do not directly capture the underlying board pro-
cesses through which members access, utilize, and
synthesize each other’s knowledge. To address
this limitation, future researchers should directly
examine the board processes that facilitate (or hin-
der) board decision making. Second, although we
found evidence that boards benefited from high
levels of co-working experience in the process of
CEO selection, some prior work has suggested
that board stability may have a negative effect
on performance. For example, long-serving boards
have been shown to initiate fewer strategic changes
(Goodstein and Boeker, 1991) or set higher pay
for the CEO (Vafeas, 2003). Future work would
benefit by investigating the situations under which
board stability, which contributes to both firm- and
team-specific knowledge of the directors, would be
preferred over a rotation of board members, which
allows for an infusion of new ideas. Third, we only
examined nondiversified firms in order to mini-
mize heterogeneity and maximize internal valid-
ity. Hence, the generalizability of our results to
a more diversified sample may be limited. Fourth,
while we focused on a particularly critical decision
context, that is, new CEO selection, the generaliz-
ability of our findings also has to be assessed in
the context of other strategic decisions.
Board ability has received increasing public
attention in recent years. As the ratios of inde-
pendent directors have significantly increased in
many large public corporations (Kor and Sundara-
murthy, 2009), it has never been more urgent than
it is now to explore how independent directors may
contribute to the company. We hope the findings
reported here will spur future efforts to exam-
ine how the effectiveness of boards of directors
is affected by various types of board human and
social capital.
ACKNOWLEDGEMENTS
We thank Pallavi Kumar and Warren Kang for their
help in data collection. We also thank Editor Will
Mitchell and two anonymous reviewers for their
helpful comments and suggestions.
REFERENCES
Adler PS, Kwon S-W. 2002. Social capital: prospects
for a new concept. Academy of Management Review
27(1): 17–40.
Strat. Mgmt. J., 32: 731–747 (2011)
DOI: 10.1002/smj

Aiken LS, West SG. 1991. Multiple Regression: Testing
and Interpreting Interactions. Sage Publications:
Newbury Park, CA.
Andrews KR. 1980. Directors’ responsibility for cor-
porate strategy. Harvard Business Review 58(6):
30–42.
Bandura A. 1997. Self-efficacy: The Exercise of Control .
W.H. Freeman and Company: New York.
Barkema HG, Shvyrkov O. 2007. Does top management
team diversity promote or hamper foreign expansion?
Strategic Management Journal 28(7): 663–680.
Baysinger BD, Hoskisson RE. 1990. The composition of
boards of directors and strategic control: effects on
corporate strategy. Academy of Management Review
15(1): 72–87.
Bazerman MH, Schoorman FD. 1983. A limited ratio-
nality model of interlocking directorates. Academy of
Management Review 8(2): 206–217.
Becker GS. 1975. Human Capital: A Theoretical
and Empirical Analysis, with Special Reference to
Education (2nd edn). National Bureau of Economic
Research: Cambridge, MA.
Bianco A, Bryrne JA. 1997. The rush to quality on
corporate boards. Business Week , 3 March, 34.
Borgatti SP, Cross R. 2003. A relational view of
information seeking and learning in social networks.
Management Science 49(4): 432–445.
Borokhovich KA, Parrino R, Trapani T. 1996. Outside
directors and CEO selection. Journal of Financial and
Quantitative Analysis 31(3): 337–355.
Boyd BK. 1990. Corporate linkages and organizational
environment: a test of the resource dependence
model. Strategic Management Journal 11(6):
419–430.
Brickley JA, Linck JS, Coles JL. 1999. What happens
to CEOs after they retire? New evidence on
career concerns, horizon problems, and CEO
incentives. Journal of Financial Economics 52(3):
341–377.
Burt RS. 1980. Cooptive corporate actor networks: a
reconsideration of interlocking directorates involving
American manufacturing. Administrative Science
Quarterly 25(4): 557–582.
Burt RS. 1997. The contingent value of social capital.
Administrative Science Quarterly 42(2): 339–365.
Cannella AA Jr, Lubatkin M. 1993. Succession as
a sociopolitical process: internal impediments to
outsider selection. Academy of Management Journal
36(4): 763–793.
Cannella AA Jr, Park J-H, Lee H-U. 2008. Top manage-
ment team functional background diversity and firm
performance: examining the roles of team member
colocation and environmental uncertainty. Academy of
Management Journal 51(4): 768–784.
Cannella AA Jr, Shen W. 2001. So close and yet
so far: promotion versus exit for CEO heirs
apparent. Academy of Management Journal 44(2):
252–270.
Carpenter MA, Westphal JD. 2001. The strategic context
of external network ties: examining the impact
of director appointments on board involvement in
Copyright  2010 John Wiley & Sons, Ltd.
10970266, 2011, 7, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/smj.909 by Indian Institute Of Management, Wiley Online Library on [29/09/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Board Capital and CEO Selection 745
strategic decision making. Academy of Management
Journal 44(4): 639–660.
Carroll GR, Harrison JR. 1998. Organizational demogra-
phy and culture: insights from a formal model and
simulation. Administrative Science Quarterly 43(3):
637–667.
Castanias RP, Helfat CE. 1991. Managerial resources and
rents. Journal of Management 17(1): 155–171.
Charan R. 2005. Boards that Deliver: Advancing Cor-
porate Governance from Compliance to Competitive
Advantage. Jossey Bass: San Francisco, CA.
Conger JA, Finegold D, Lawler EE. 1998. Appraising
boardroom performance. Harvard Business Review
76(1): 136–148.
Conger JA, Lawler EE, Finegold DL. 2001. Corporate
Boards: Strategies for Adding Value at the Top. Jossey
Bass: San Francisco, CA.
Cramton CD. 2001. The mutual knowledge problem
and its consequences for dispersed collaboration.
Organization Science 12(3): 346–371.
Daily CM, Johnson JL, Dalton DR. 1999. On the mea-
surements of board composition: poor consistency and
a serious mismatch of theory and operationalization.
Decision Sciences 30(1): 83–106.
Datta DK, Rajagopalan N. 1998. Industry structure
and CEO characteristics: an empirical study of
succession events. Strategic Management Journal
19(9): 833–852.
Day DV, Lord RG. 1992. Expertise and problem cat-
egorization: the role of expert processing in
organizational sense-making. Journal of Management
Studies 29(1): 35–47.
Fama EF, Jensen MC. 1983. Separation of ownership
and control. Journal of Law and Economics 26:
301–325.
Ferris SP, Jagannathan M, Pritchard AC. 2003. Too busy
to mind the business? Monitoring by directors with
multiple board appointments. Journal of Finance
58(3): 1087–1111.
Fich EM. 2005. Are some outside directors better than
others? Evidence from director appointments by
Fortune 1000 Firms. Journal of Business 78(5):
1943–1971.
Friedman SD, Singh H. 1989. CEO succession and
stockholder reaction: the influence of organizational
context and event content. Academy of Management
Journal 32(4): 718–744.
Furtado EPH, Rozeff MS. 1987. The wealth effects of
company initiated management changes. Journal of
Financial Economics 18: 147–160.
Goodstein J, Boeker W. 1991. Turbulence at the top: a
new perspective on governance structure changes and
strategic change. Academy of Management Journal
34(2): 306–330.
Hair JFJ, Anderson RE, Tatham RL, Black WC. 1998.
Multivariate Data Analysis. Prentice Hall: Upper
Saddle River, NJ.
Hambrick DC, Jackson EM. 2000. Outside directors
with a stake: the linchpin in improving gov-
ernance. California Management Review 42(4):
108–127.
Strat. Mgmt. J., 32: 731–747 (2011)
DOI: 10.1002/smj

746 J. Tian, J. Haleblian, and N. Rajagopalan
Hillman AJ, Cannella AA Jr, Paetzold RL. 2000. The
resource dependence role of corporate directors:
strategic adaptation of board composition in response
to environmental change. Journal of Management
Studies 37(2): 235–255.
Hillman AJ, Dalziel T. 2003. Boards of directors and
firm performance: integrating agency and resource
dependence perspectives. Academy of Management
Review 28(3): 383–396.
Hunter J, Hunter R. 1984. Validity and utility of alternate
predictors of job performance. Psychological Bulletin
96: 72–98.
Huson MR, Malatesta PH, Parrino R. 2004. Managerial
succession and firm performance. Journal of Financial
Economics 74(2): 237–275.
Janis IL. 1972. Victims of Groupthink: Psychological
Studies of Foreign Policy Decisions and Fiascoes.
Houghton Mifflin: Boston, MA.
Johnson JL, Daily CM, Ellstrand AE. 1996. Boards of
directors: a review and research agenda. Journal of
Management 22(3): 409–438.
Kesner IF, Dalton DR. 1994. Top management turnover
and CEO succession: an investigation of the effects
of turnover on performance. Journal of Management
Studies 31(5): 701–713.
Kesner IF, Sebora TC. 1994. Executive succession: past,
present and future. Journal of Management 20(2):
327–372.
Khurana R. 2001. Finding the right CEO: why boards
often make poor choices. MIT Sloan Management
Review 43(1): 91–95.
Khurana R. 2004. Searching for a Corporate Savior:
The Irrational Quest of Charismatic CEOs. Princeton
University Press: Princeton, NJ.
Kor YY. 2003. Experience-based top management team
competence and sustained growth. Organization
Science 14(6): 707–719.
Kor YY, Misangyi VF. 2008. Outside directors’ industry-
specific experience and firms’ liability of newness.
Strategic Management Journal 29(12): 1345–1355.
Kor YY, Sundaramurthy C. 2009. Experience-based
human capital and social capital of outside directors.
Journal of Management 35(4): 981–1004.
Kroll M, Walters BA, Wright P. 2008. Board vigilance,
director experience, and corporate outcomes. Strategic
Management Journal 29(4): 363–382.
Littlepage G, Robison W, Reddington K. 1997. Effects
of task experience and group experience on
group performance, member ability, and recognition
of expertise. Organizational Behavior and Human
Decision Processes 69(2): 133–147.
Lorsch JW, Khurana R. 1999. Changing leaders: the
board’s role in CEO succession. Harvard Business
Review 77(3): 96–105.
McDonald ML, Westphal JD, Graebner ME. 2008. What
do they know? The effects of outside director acqui-
sition experience on firm acquisition performance.
Strategic Management Journal 29(11): 1155–1177.
McWilliams A, Siegel D. 1997. Event studies in
management research: theoretical and empirical issues.
Academy of Management Journal 40(3): 626–657.
Copyright  2010 John Wiley & Sons, Ltd.
10970266, 2011, 7, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/smj.909 by Indian Institute Of Management, Wiley Online Library on [29/09/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Milliken FJ, Martins LL. 1996. Searching for common
threads: understanding the multiple effects of diversity
in organizational groups. Academy of Management
Review 21(2): 402–433.
Mintzberg H. 1973. The Nature of Managerial Work .
Harper & Row: New York.
Mitra S, Hossain M. 2007. Ownership composition and
non-audit service fees. Journal of Business Research
60(4): 348–356.
Nahapiet J, Ghoshal S. 1998. Social capital, intellectual
capital, and the organizational advantage. Academy of
Management Review 23(2): 242–266.
Parrino R. 1997. CEO turnover and outside succession:
a cross-sectional analysis. Journal of Financial
Economics 46(2): 165–197.
Penrose E. 1959. The Theory of the Growth of the Firm.
Oxford University Press: Oxford, UK.
Perry T, Peyer U. 2005. Board seat accumulation by
executives: a shareholder’s perspective. Journal of
Finance 60(4): 2083–2123.
Pfeffer J. 1991. Organization theory and structural
perspectives on management. Journal of Management
17(4): 789–803.
Rajagopalan N, Datta DK. 1996. CEO characteristics:
does industry matter? Academy of Management
Journal 39(1): 197–215.
Rosenstein S, Wyatt JG. 1994. Shareholder wealth effects
when an officer of one corporation joins the board
of directors of another. Managerial and Decision
Economics 15(4): 317–327.
Rulke DL, Rau D. 2000. Investigating the encoding
process of transactive memory development in group
training. Group & Organization Management 25(4):
373–396.
Shen W, Cannella AA Jr. 2003. Will succession planning
increase shareholder wealth? Evidence from investor
reactions to relay CEO successions. Strategic Man-
agement Journal 24(2): 191–198.
Shivdasani A, Yermack D. 1999. CEO involvement in
the selection of new board members: an empirical
analysis. Journal of Finance 54(5): 1829–1853.
Tsui AS, Egan TD, O’Reilly CA III. 1992. Being
different: relational demography and organizational
attachment. Administrative Science Quarterly 37:
549–579.
Vafeas N. 2003. Length of board tenure and outside
director independence. Journal of Business Finance &
Accounting 30(7/8): 1043–1064.
Vancil RF. 1987. Passing the Baton: Managing the
Process of CEO Succession. Harvard Business School
Press: Boston, MA.
Weisbach MS. 1988. Outside directors and CEO turnover.
Journal of Financial Economics 20: 431–460.
Westphal JD, Fredrickson JW. 2001. Who directs strate-
gic change? Director experience, the selection of new
CEOs, and change in corporate strategy. Strategic
Management Journal 22(12): 1113–1137.
Williamson IO, Cable DM. 2003. Organizational hiring
patterns, interfirm network ties and interorganizational
imitation. Academy of Management Journal 46(3):
349–358.
Strat. Mgmt. J., 32: 731–747 (2011)
DOI: 10.1002/smj

Zahra SA, Pearce JA II. 1989. Boards of directors
and corporate financial performance: a review and
integrated model. Journal of Management 15(2):
291–334.
Zajac EJ. 1990. CEO selection, succession, compensation
and firm performance: a theoretical integration and
empirical analysis. Strategic Management Journal
11(3): 217–230.
Copyright  2010 John Wiley & Sons, Ltd.
10970266, 2011, 7, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/smj.909 by Indian Institute Of Management, Wiley Online Library on [29/09/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Board Capital and CEO Selection 747
Zhang Y, Rajagopalan N. 2004. When the known devil
is better than an unknown god: an empirical study
of the antecedents and consequences of relay CEO
successions. Academy of Management Journal 47(4):
483–500.
Strat. Mgmt. J., 32: 731–747 (2011)
DOI: 10.1002/smj