The Advisory Role of Foreign Directors in U.S. Firms

We study the role of foreign directors in U.S. firms. We conclude that foreign directors, especially those from countries that are dissimilar to the U.S. in terms of business environment (i.e., dissimilar directors), are chosen by multinational corporations (MNCs) to provide advice, and this advice is valuable. We measure director dissimilarity along the dimensions of legal regime, language, trust, and religion. Our conclusion is supported by two findings. (i) Firms with operations in countries that are dissimilar to the U.S. in terms of business environment are more likely to choose dissimilar directors. (ii) The average announcement period return to the appointment of foreign directors is significantly positive, and is due to appointments by MNCs, and within MNCs, to dissimilar directors. Analysis using Tobin's q leads to similar inferences