Strategic Management Journal
Strat. Mgmt. J., 36: 339–359 (2015)
Published online EarlyView 16 January 2014 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2215
Received 4 March 2012 ; Final revision received 11 November 2013
CONSTRAINTS IN ACQUIRING AND UTILIZING
DIRECTORS’ EXPERIENCE: AN EMPIRICAL STUDY
OF NEW-MARKET ENTRY IN THE PHARMACEUTICAL
INDUSTRY
LUIS DIESTRE,1* NANDINI RAJAGOPALAN,2 and SHANTANU DUTTA2
1
IE Business School, Strategy Department, Madrid, Spain
Marshall School of Business, Management Department, University of Southern
California, Los Angeles, California, U.S.A.
2
In this study we provide evidence that firms considering entering new markets are more likely to
appoint directors with experience in those markets; and subsequently, we show that directors’
market experience increases the likelihood of new-market entry. Moreover, we explore the
presence of constraints in both, acquiring experienced directors and utilizing their experience.
Specifically, we find that experienced directors are less likely to join firms with financial
restatements in the recent past as well as firms with a lower status than the firms where they
currently serve. In addition, we find that interlocking directors’ experience is less likely to lead
to new-market entry for firms that lack new-product development experience and that exhibit a
high level of market overlap with interlocked firms. Copyright © 2013 John Wiley & Sons, Ltd.
INTRODUCTION
The importance of interlocking directors in corporate boards has garnered considerable attention
from management scholars. Prior research suggests that one of the main functions of interlocking
directorates is the provision of unique knowledge
and expertise (Hillman and Dalziel, 2003; McDonald, Westphal, and Graebner, 2008). In particular,
several studies have shown that directors’ experience obtained through their involvement in other
organizations is a significant predictor of alliance
formation (Gulati and Westphal, 1999), corporate
acquisitions (Kroll, Walters, and Wright, 2008;
McDonald et al., 2008), CEO selection decisions
(Tian, Haleblian, and Rajagopalan, 2011; Westphal
Keywords: director interlocks; new-market entry; director
appointment; new-product development; biopharmaceutical industry
*Correspondence to: Luis Diestre, Calle Alvarez de Baena 4,
28006, Madrid (Spain). E-mail: [email protected]
Copyright © 2013 John Wiley & Sons, Ltd.
and Fredrickson, 2001), and strategic change (Carpenter and Westphal, 2001). The main conclusion
of this stream of research is that firms may benefit from interlocking directors’ experience across a
broad range of strategic activities.
If interlocking directors’ experience provides all
these benefits, one would expect that all firms
should be taking advantage of this source of
knowledge. However, when we look at firms’ current behavior, we find that not all firms exploit this
source of expertise to the same degree (Shropshire,
2010; Withers, Hillman, and Cannella, 2012). Why
are some firms not taking advantage of interlocking directors’ expertise? What constraints are preventing these firms from exploiting this source
of knowledge? Despite the importance of this
question, there is virtually no research examining the constraints that firms face when trying to
benefit from interlocking directors’ expertise. We
attempt to address this limitation by examining
two types of constraints firms face when trying to
benefit from this type of experience: (1) constraints
340
L. Diestre, N. Rajagopalan, and S. Dutta
in appointing experienced interlocking directors
and (2) constraints in utilizing interlocking directors’ experience. Our goal is therefore to provide a
deeper theoretical and empirical understanding of
the factors that enable or constrain the ability of
firms to utilize directors’ knowledge.
First, we propose that firms may face constraints in acquiring directors with market-relevant
experience. Prior research has often conceptualized directors as passive resources whose expertise
firms can access at will (Shropshire, 2010). Yet, it
is likely that potential directors have preferences
when it comes to what boards to join (Withers
et al., 2012). Hence, we build on the assumption that directors will ultimately be driven by
personal preferences to propose that some firms
may face critical constraints when trying to attract
experienced directors to their boards. Second, we
argue that the presence of interlocking directors
with useful experience does not necessarily mean
that the firm will be able to utilize these directors’ expertise. Accordingly, we propose that some
firms may face critical constraints when trying to
utilize directors’ knowledge.
In exploring the constraints faced by firms when
trying to attract and utilize interlocking directors’ experience we focus on new-market entry
strategies, a strategic decision that, to the best
of our knowledge, has not been explored in
extant literature. We focus on new-market entry
decisions for the following two reasons. First,
examining the effects of interlocking directors’
experience on new-market entry will add to our
understanding of the reach and scope of directors’ influence. Second, we believe that interlocking directors’ experience obtained at other organizations is likely to be particularly valuable for
new-market entry strategies. Directors’ marketspecific experience obtained at incumbent firms
(firms that are already active in a given market) may provide knowledge about the characteristics of such a market, a particularly valuable
resource given the high level of uncertainty that
typically characterizes new-market entry decisions
(Dowell and Killaly, 2009; Henisz and Delios,
2001; King and Tucci, 2002). Therefore, our study
focuses on the following two issues. First, we
explore whether interlocking directors’ expertise
is indeed a resource that firms acquire and utilize
for new-market entry. Second, we identify the constraints that firms face in acquiring and utilizing
Copyright © 2013 John Wiley & Sons, Ltd.
interlocking directors’ expertise for this specific
strategic outcome.
THEORY AND HYPOTHESES
Interlocking directors’ market-specific
experience: likelihood of new-director
appointment and likelihood of new-market
entry
We propose that firms considering entering a
new market will be more likely to appoint directors with market-specific experience (obtained at
incumbent firms) and that the level of interlocking
directors’ experience in a specific market (obtained
from their involvement at incumbent firms) will
increase the likelihood that the focal firm will enter
the new market. We expect these effects because of
two primary arguments. First, firms that are able to
access incumbents’ direct market experience face
a lower degree of uncertainty in new-market entry
decisions. Second, directors provide a means of
accessing incumbents’ direct market experience.
We next develop these two arguments in greater
depth.
Several empirical studies have explored the
factors that determine the likelihood that a firm
will enter a new market (King and Tucci, 2002;
Mitchell and Singh, 1992). This literature agrees
on the basic premise that new-market entry is
accompanied by a significant level of uncertainty
on several dimensions. A new entrant lacks
specific knowledge about consumer preferences,
demand trends, and temporal variations, as well as
competitors’ profiles and their expected behaviors
(Henisz and Delios, 2001; King and Tucci, 2002).
A high degree of uncertainty implies that a
potential entrant is unsure about the benefits
that may arise from such strategy and so is
less confident about entering these new markets
(Dowell and Killaly, 2009).
Firms can rely on several sources of information
as a way to mitigate and overcome new-market
entry uncertainty. On one hand, evidence suggests
that a firm can rely on its own experiential learning
from previous entries into other unfamiliar markets
(Henisz and Delios, 2001; King and Tucci, 2002).
Prior entries into new markets help to build
second-order competencies that enable a firm to
gather and process relevant information about
unknown environments (Henisz and Delios, 2001;
Strat. Mgmt. J., 36: 339–359 (2015)
DOI: 10.1002/smj
Interlocking Directors and New-Market Entry
King and Tucci, 2002). On the other hand,
new entrants can obtain vicarious knowledge
about a new market by accessing incumbent
firms’ experience. Mitchell and Singh (1992), for
example, found that firms with active alliances
with incumbent firms were more likely to enter
those specific markets.
We argue that a director who also holds a
directorship position at an incumbent organization (defined as an interlocking director) provides
an alternative channel through which a focal firm
can access an incumbent’s market-specific experience. An incumbent firm’s director can gain
valuable market-specific experience from participating in the board-level discussion of strategic activities within a given market throughout
his/her tenure at that firm (Kroll et al., 2008;
McDonald et al., 2008). Being active in those
strategic discussions and having access to marketspecific information may provide such a director
with valuable knowledge about consumers’ preferences, expected trends, and the characteristics
and behaviors of competitors in that market. Thus,
directors’ cumulative market-specific knowledge
obtained from their past participation at incumbent
firms has the potential to reduce the uncertainty
that a focal firm faces when considering whether
to enter a new market. Hence, consistent with this
logic, we propose that firms considering entering
a specific market will try to access this source of
expertise as a way to reduce the uncertainty surrounding a risky strategic decision.
Hypothesis 1: A potential interlocking director’s
experience in markets in which a focal firm is
considering entering will increase the likelihood
that the focal firm will appoint that director.
As explained above, directors’ market-specific
knowledge has the potential to reduce the uncertainty associated with new-market entry strategies.
To the extent that entering a new market is a critical event with strong implications for the focal
firm’s short and long-term performance we expect
that such a crucial decision is likely to reach the
level of the focal firm’s board of directors, where
interlocking directors’ expertise should be highly
influential (McDonald et al., 2008). Accordingly,
those firms that are able to access this marketspecific experience should face a lower level of
uncertainty, which should increase the likelihood
of new-market entry.
Copyright © 2013 John Wiley & Sons, Ltd.
341
Hypothesis 2: The market-specific experience
of interlocking directors will increase the likelihood that the focal firm will enter that new
market.
Constraints in acquiring experienced
interlocking directors
In this section we argue that firms may face critical
constraints when trying to recruit a director with
experience in a particular market (i.e., a director
who already serves on an incumbent firm’s board).
As suggested in prior studies, directors are not passive players in the appointment process (Withers
et al., 2012). On the contrary, sometimes directors decide not to join a firm’s board (Lorsch
and MacIver, 1989). Thus, the effect proposed
in Hypothesis 1 relies on the implicit assumption
that once the firm conveys its interest in recruiting an experienced director, such a candidate
will join the board. In this section we relax this
assumption and refine our theoretical arguments by
invoking the perspective that directors behave as
individuals acting on personal motives. That is, we
expect a potential director’s experience to increase
the likelihood of appointment (experience is the
necessary condition for director appointment as
proposed in Hypothesis 1) as long as the candidate’s (perceived) personal benefits associated
with joining that board outweigh the personal
costs.
When it comes to understanding the personal
benefits and costs that directors experience by
joining specific boards, prior research argues that
one of their main motivations is the opportunity
to play a useful role and be helpful for the firm
(Boivie, Graffin and Pollock, 2012; Withers et al.,
2012). This is because influential directors may
build reputations as experts and advisors that may
translate into greater economic benefits as well
as a greater chance of obtaining future board
appointments (Yermack, 2004). This provides a
win-win situation in which both, the firm and the
director, may benefit from mutual collaboration.
Yet, prior research has also pointed out that
directors might be unwilling to join specific boards
due to the expected personal costs from such a
decision (Lorsch and MacIver, 1989). Specifically,
two of the areas that directors are most frequently
concerned about are (1) the extent to which
their personal reputation is affected by the firm’s
misbehavior and (2) potential conflicts of interest
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L. Diestre, N. Rajagopalan, and S. Dutta
between interlocked firms (Boivie et al., 2012;
Lorsch and MacIver, 1989; Withers et al., 2012).
First, prior research has found that directors are
often stigmatized for their firms’ accounting irregularities (Kang, 2008) and that this bad reputation
has strong negative consequences for directors.
For instance, Srinivasan (2005) and Fich and
Shivdasani (2007) provide evidence that directors’
value in the labor market (as reflected in the number of board memberships) is adversely affected
by their firm’s current reputation (measured as
financial irregularities or lawsuits). Therefore,
based on this evidence, we expect that directors
will show a lower willingness to join firms whose
reputation has been damaged by recent financial
irregularities. Thus, recent financial restatements
will adversely affect the ability of firms seeking
to appoint experienced directors—while the firm
may be motivated to recruit such a director
(Hypothesis 1), the director’s willingness to join
the board is adversely impacted by fears that the
firm’s reputation may harm the director’s image
through negative spillovers.
Hypothesis 3: The number of financial restatements a firm was involved in the past will
negatively moderate the effect proposed in
Hypothesis 1 .
Second, as suggested in prior research, directors are also highly concerned about potential conflicts of interest that may arise between interlocked
firms (Lorsch and MacIver, 1989; Withers et al.,
2012). Specifically, if a director accepts a directorship offer and helps a focal firm enter a new
market using information obtained at an incumbent firm, there is potential for serious conflict.
Sharing market-specific information obtained at an
incumbent firm might have harmful competitive
consequences for the incumbent organization. An
incumbent’s market-specific knowledge is a valuable resource for such a firm as long as it is
protected from other competitors. Hence, if other
firms are able to access this know-how and use it
against the incumbent firm, this is likely to jeopardize the incumbent firm’s performance in that
market. Directors may suffer important personal
costs in these cases that may lead to the termination of the directorship at the incumbent firm
(Latham & Watkins LLP, 2009). Firms are very
aggressive in guarding the information shared in
Copyright © 2013 John Wiley & Sons, Ltd.
board meetings, and breaches of confidentiality
usually end up with the director being removed
from the board (Latham & Watkins LLP, 2009;
Wachtell, Lipton, Rosen & Katz LLP, 2006). Consistent with the prediction that maintaining simultaneous board appointments may lead to added
pressures and eventually directorship termination,
Boivie et al. (2012) report how directors with multiple directorships are more likely to leave some of
their board appointments.
Accordingly, we expect directors to weigh the
expected benefits (greater reputation as experts)
against these expected costs (directorship termination at the incumbent firm) in their decision
to accept an offer to join another firm’s board.
Specifically, we expect that a director will be more
willing to accept a directorship offer when the offer
comes from a firm that has a relatively higher status than the incumbent firm where this director
currently serves. In these cases, the expected benefits from joining a more prestigious firm are more
likely to outweigh the expected costs of directorship termination at the (lower status) incumbent
firm (Lorsch and MacIver, 1989; Withers et al.,
2012). However, if the offer comes from a firm that
has a lower status relative to the incumbent firm, it
is less likely that the benefits (from joining a less
prestigious firm) will outweigh the costs of losing
a more valuable directorship (i.e., in a higher status firm). Based on this logic, we propose that a
firm with a higher status relative to the incumbent
firm where the director currently serves will have
a greater chance of attracting that director. Thus,
the positive effect of a director’s market-relevant
experience (the necessary condition, as proposed in
Hypothesis 1) on the likelihood of being appointed
to the board of another firm will be strengthened
when the focal firm has a relatively higher status
than the incumbent firm.
Hypothesis 4: The status differential between
the focal and the incumbent firm will positively
moderate the effect proposed in Hypothesis 1;
i.e., the higher the status of the focal firm relative
to the incumbent firm, the stronger the effect
proposed in Hypothesis 1 .
Constraints in utilizing interlocking directors’
experience
In the logic leading to Hypothesis 2, we argued that
interlocking directors’ experience will increase the
Strat. Mgmt. J., 36: 339–359 (2015)
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Interlocking Directors and New-Market Entry
likelihood of new-market entry through reducing
several dimensions of uncertainty. We now argue
that the strength of this mechanism (leading to the
effect proposed in Hypothesis 2) will be contingent
on two factors. First, the extent to which directors’ experience reduces market-specific uncertainty will depend on whether the firm has
the necessary absorptive capacity to assimilate,
decode, and use directors’ market-specific expertise (Cohen and Levinthal, 1990). Second, while
utilizing directors’ expertise might help reduce
some elements of uncertainty, it may amplify other
sources of uncertainty that result in a greater perceived risk and thus discourage firm entry (Dowell
and Killaly, 2009; Henisz and Delios, 2001). Each
of these arguments is further developed below.
First, not all firms will be equally able to
assimilate and utilize directors’ expertise to reduce
the level of market uncertainty because firms
will possess different levels of absorptive capacity
(Cohen and Levinthal, 1990). Consistent with prior
research on new-market entry, we propose that
firms that have introduced many new products
in the past have developed routines that enable
them to identify better the information that is
critical to introduce a new product into a specific
market, as well as the capabilities needed to decode
and process such critical information (Gavetti and
Levinthal, 2000). These routines, therefore, should
enable the firm’s managers to identify useful cues
in directors’ information that a less-experienced
firm is less likely to notice (Levitt and March,
1988). Without prior experience in new-product
developments, we argue, firms lack the ability
to make sense of the information provided by
directors (Dowell and Killaly, 2009). Accordingly,
firms with these capabilities (arising from newproduct development experience) should see a
greater reduction in market-specific uncertainty
when accessing directors’ experience, increasing
therefore the likelihood of new-market entry.
Hypothesis 5: The focal firm’s new-product
development experience will positively moderate
the effect proposed in Hypothesis 2 .
Second, we argue that utilizing directors’ expertise (obtained at an incumbent firm) to enter a
given market represents an increase in the risk
of regulatory (anti-trust) investigation. It is important to note that, after such entry, the existing
Copyright © 2013 John Wiley & Sons, Ltd.
343
interlock will automatically become an interlock
between competing firms (firms in the same market), and Section 8 of the Clayton Act states that
“[n]o person shall, at the same time, serve as a
director or officer in any two corporations” that
are “competitors.” Firms violating Section 8 of
the Clayton Act may face severe penalties and
may even be forced to terminate the directorship in question (Paul, Weiss, Rifkind, Wharton &
Garrison LLP, 2009). The magnitude of this risk,
therefore, will shape the extent to which directors’ market-specific experience increases the likelihood of new-market entry (the effect proposed in
Hypothesis 2).
The risk of being subject to anti-trust investigation after entering a market where an interlocked firm is active, however, varies across firms.
Although there is some uncertainty about when a
firm is in violation of Section 8 of the Clayton Act
(Gerber, 2007), firms are aware of the fact that a
higher degree of market overlap with interlocked
firms implies a greater risk of anti-trust investigation (Paul et al., 2009). Therefore, the increase in
regulatory risk associated with entering a market
in which an interlocked firm is already active is
especially strong for those firms that already have
a high degree of market overlap with their respective interlocked firms. Hence, for such firms, the
effect of directors’ experience on the likelihood of
new-market entry should be weaker due to this relatively stronger regulatory risk. Accordingly, we
expect that the positive effect of interlocking directors’ experience on the probability of new-market
entry (proposed in Hypothesis 2) will be negatively
moderated by the ex ante degree of market overlap
between interlocked firms.
Hypothesis 6: The ex ante level of market overlap between interlocked firms will negatively
moderate the effect proposed in Hypothesis 2 .
METHODS
Empirical context
We focused on new-director appointment and
new-market entry decisions of firms in the pharmaceutical industry for several reasons. First, this
industry provides a clear set of differentiable markets (i.e., therapeutic areas), each of which is
characterized by distinct technologies, customers,
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L. Diestre, N. Rajagopalan, and S. Dutta
and competing drugs (Macher and Boerner, 2006;
Nerkar and Roberts, 2004; Rothaermel and Deeds,
2004). Second, the presence of interlocking directorates among firms that are active in different therapeutic markets is a frequent phenomenon in this
industry (69% of all companies in our final sample
shared a director with another pharmaceutical firm
at some point in time). Finally, because firms need
to go through several regulatory stages required by
the Food and Drug Administration (FDA), we were
able to capture new-product development projects
from the beginning (i.e., the pre-clinical stage) and
thus identify entry decisions at a very early stage.
Data and sample
We identified pharmaceutical companies as those
organizations in the biopharmaceutical industry
that market human pharmaceuticals (Rothaermel
and Deeds, 2004). We obtained data on pharmaceuticals’ drug developments in new markets from Medtrack (Diestre and Rajagopalan,
2012). This database, created by Life Science
Analytics, provides firm-level information on newdrug-development activities across 17 therapeutic
markets on private and public biomedical companies. In addition, this database provides information about each pharmaceutical firm’s alliances
and corporate venture activities, as well as their
patent portfolios. Further, we obtained director
appointment data, as well as data on the characteristics of the board of directors for public pharmaceutical firms from annual proxy statements
provided by the Securities and Exchange Commission (SEC). From this source, we obtained boardspecific data (board size and number of annual
meetings), director-specific data (age, tenure, and
type of directorship), as well as information about
each director’s additional directorships in other
pharmaceutical companies. In addition, financial
restatement data was obtained from the Financial
Statement Restatement Database (Arthaud-Day
et al., 2006). Moreover, we complemented patent
data from Medtrack with data from the National
Bureau of Economic Research (NBER) patent
database (Hall, Jaffe, and Trajtenberg, 2001).
Finally, we relied on the COMPUSTAT database
for the construction of some of our controls.
Because data on some explanatory variables
were only available for public firms (e.g., board
data), the samples for both of our tests (director
appointment and new-market entry) were selected
Copyright © 2013 John Wiley & Sons, Ltd.
from the universe of 173 public companies developing and marketing human pharmaceuticals available in Medtrack. We selected those firms for
which we had data on all our explanatory variables, and we ended up with 131 pharmaceutical
companies for the 2000–2006 period. It is important to note that we relied on different sample
sizes for each of our two dependent variables.
While we relied on all 131 pharmaceutical firms
for the dependent variable focusing on new-market
entry; for the dependent variable focusing on new
director appointments, however, there is an additional restriction when it comes to selecting the
final sample. In our theory, we explained that we
examine appointments of directors based on the
experience these directors have in those markets
that the focal firm is considering entering. Hence,
we only included those firms that were considering
entry into at least one market.
In order to identify whether a firm was considering entry into a specific market, we relied
on recent research that has argued that firms that
possess technological knowledge applicable to a
specific market are likely to have the intention to
enter that given market in the future (Cockburn
and MacGarvie, 2011). Accordingly, we assumed
that firms were considering entering those markets
for which they had recently developed technological knowledge based on the following process.
First, we identified the patents granted to each
firm in the last five years. Second, we examined
the applicability of these patents across therapeutic markets. To do this, we used a dataset available
within Medtrack (Worldwide Patent Viewer) that
links specific active ingredients to the patents that
protect the know-how embedded in each of them.
Thus, since we had information on the therapeutic market in which each active ingredient was
used, we were able to create a matrix that linked
specific therapeutic markets to unique patent categories; i.e., the patent class and subclass (Diestre
and Rajagopalan, 2012). Through this procedure,
we were able to determine if a focal firm was
considering entering a specific market by identifying whether that firm had recently obtained patents
applicable to that therapeutic category. In sum, we
assumed that a focal firm was considering entering
therapeutic market m (in which it has yet no activity) in year t if such firm had obtained at least one
patent in the last five years that was applicable to
that therapeutic category (on average, the firms in
our sample were considering entering 3.6 markets,
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Interlocking Directors and New-Market Entry
which represented 26.8% of the markets in which
they had no activity). These criteria resulted in a
sample of 125 pharmaceutical companies during
the 2000–2006 period (i.e., out of the total sample
of 131 public firms, 125 of them were considering
entry into at least one new market).
Measures
We first describe the dependent, independent, and
moderating variables that pertain to new-director
appointment followed by a description of the
dependent, independent, and moderating variables pertaining to new-market entry. Finally, we
describe the control variables used in the regression models for both cases.
New-director appointment
As stated in the theory section, this measure
is intended to capture whether a focal firm
(that was considering entering a new market)
appointed a new director that currently served on
another pharmaceutical firm’s board. Therefore,
this variable is at the firm-director level of
analysis. We had earlier described the procedure
used to select the 125 firms that are included in
the sample for this first dependent variable. We
now explain the criteria used to select the list of
potential directors and how we combined this list
of directors with the list of 125 selected firms to
generate our first dependent variable (and therefore
the full sample of firm-director combinations).
First, we identified the list of potential interlocking
directors that could be appointed to a focal firm’s
board by including all directors currently serving
on the board(s) of other pharmaceutical firms. That
is, if director d was not on the board of company i
in year t-1, such director was considered a potential
appointment for year t. With this list, we explored
all possible firm-director combinations (combining
our 125 firms with a list of 1,810 directors)
for our sample period (2000–2006). Second, we
looked at firms’ proxy statements to identify the
directors that each firm appointed every year
during the selected sample period. With these
data we could identify those potential firm-director
combinations that were realized in year t (i.e.,
appointment took place in year t and hence the
dependent variable was coded 1, APPidt = 1), as
well as those combinations that were not realized
(APPidt = 0).
Copyright © 2013 John Wiley & Sons, Ltd.
345
Potential director’s experience
As explained above, we identified the markets
a firm is considering entering by looking at the
markets for which the firm had obtained patents
in the last five years. Once we identified what
markets a focal firm was considering entering, we
could identify each potential director’s experience
in those markets. We captured this experience by
examining the activities of the firms where these
potential directors had served.
Consistent with prior research, we relied on
the assumption that experience is developed
from accumulated learning with similar activities (Macher and Boerner, 2006; Nerkar and
Roberts, 2004); thus, a greater exposure to newdrug introductions in a given therapeutic market
will provide directors with greater market-specific
understanding. Building on this assumption, we
followed three steps to create the measure of
potential director’s experience. First, for each
potential director d we created a measure of experience in each therapeutic market m in year t.
We did this by identifying the number of new
drugs that were introduced in year t for market m by each firm j in which director d held a
directorship:
Director_Experiencedmt =
New _Drugsjmt .
j
Second, we created a dyad-level measure (focal
firm-director) by cumulating the experience of
director d across all therapeutic markets m in
which firm i is considering entering:
Iimt x Director_Experiencedmt , where Iim
m
has a value of 1 if firm i is considering
entering market m in year t, and 0 otherwise.
Third, we assumed that experience accumulates
over time so the firm might also have access
to this potential director’s experience obtained in
previous years. Therefore, in order to capture the
full extent of a potential director’s experience in
those markets firm i was considering entering,
we examined experience obtained in the most
recent three-year window (Nerkar and Roberts,
2004). However, because recent experience is
more valuable than older experience, we used a
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L. Diestre, N. Rajagopalan, and S. Dutta
depreciation factor (δ) of 40 percent (Macher and
Boerner, 2006):
Potential _Director s_Experienceidt
=
Iimt x Director_Experiencedmt
m
+δ×
Iimt x Director_Experiencedmt−1
m
+ δ2 ×
Iimt x Director_Experiencedmt−2
m
Financial restatements
The Financial Statement Restatement Database
provides historical information about firms’
accounting irregularities (Arthaud-Day et al.,
2006). Relying on these data we measured this
variable as the number of financial restatement
cases in which a focal firm had been involved in
the last three years.
Relative status
Consistent with prior studies we assumed that partnerships with other firms in the same industry
capture a firm’s status (Cowen, 2012; Podolny,
2005). In order to create a measure of relative status between the focal firm and the firm in which
the potential director currently serves we did as
follows. First, we calculated each firm’s status by
counting the number of alliances each firm had
established with other pharmaceutical firms in the
last five years. In those cases where a potential
director served on more than one board, we calculated the average value of the status scores of all
these firms. Second, we subtracted the status score
of the incumbent firm where the potential director
currently served from the status score of the focal
firm. Thus, higher values of our measure imply that
the focal firm had a higher status than the firm(s)
where the potential director currently served.
New-market entry
This measure (our second dependent variable) is
intended to capture whether the focal firm had
entered into a new therapeutic market or not. This
variable, accordingly, was measured at the firmmarket level of analysis. Earlier, we noted that our
final sample for this dependent variable included
Copyright © 2013 John Wiley & Sons, Ltd.
131 public pharmaceutical firms. Now, we explain
the criteria we relied on to select the markets these
131 firms could potentially enter to generate our
second dependent variable (and therefore the full
sample of firm-market combinations).
Prior research shows that the earliest stage at
which we can identify the intention to enter into
a new market is when a drug candidate targeted
at a specific therapeutic market starts pre-clinical
trials (Rothaermel and Deeds, 2004). We relied
on Medtrack data that provided information about
new drug candidates that entered pre-clinical tests,
as well as information about the therapeutic area
toward which each drug candidate was targeted.
Thus, we could identify every new therapeutic
market into which each company had decided to
enter during the 2000–2006 window based on the
development of new drug candidates for markets
in which those firms had no prior activity.
Similar to the methodology described for our
first dependent variable and consistent with the
method adopted by King and Tucci (2002) and
Dowell and Killaly (2009), we first identified
all possible new therapeutic markets into which
firms could enter. If company i had not started to
develop a drug for therapeutic market m before
year t (through either in-house development or a
strategic alliance with an incumbent firm), then
therapeutic market m was considered to be a
potential destination for company i in year t.
Those firm-market combinations that were realized in year t through any of the following three
entry modes—in-house development, an alliance,
or an acquisition—were coded 1 (ENTRYimt = 1),
whereas those that were not realized by the end
of year t were coded 0 (ENTRYimt = 0). In all,
we had 8,876 potential entries for our 131 companies in the 2000–2006 period. New-market entry
occurred in 494 of these 8,876 potential entries
in the sample (5.56%), and the firms in our sample showed a high level of heterogeneity in terms
of the number of new-market entry moves (while
some firms did not enter any new market during
the entire period, others entered as many as 11 new
markets). Out of the 131 firms in our sample, 105
(80.2%) had entered at least one new therapeutic
market during the study period.
Interlocking directors’ experience
We captured current interlocking directors’ experience in a given market by examining the
Strat. Mgmt. J., 36: 339–359 (2015)
DOI: 10.1002/smj
Interlocking Directors and New-Market Entry
new-drug- introduction activities of the firms on
whose boards these directors served. First, for
each director d of the focal pharmaceutical firm
i, we created a measure of experience in therapeutic area m in year t. We did this by identifying
the number of new drugs that were introduced in
year t for therapeutic market m by each interlocking firm j in which director d also held a
directorship:
Director_Experiencedimt =
New _Drugsjmt .
j
Second, we created a dyad level measure (focal
firm-market) by cumulating the experience scores
for all of the directors who sat on the board of the
focal company i:
Director_Experiencedimt .
d
This measure captured the overall experience
in market m of all the focal firm’s interlocking
directors obtained in year t. Finally, we examined
directors’ experience obtained in the most recent
three-year window (Nerkar and Roberts, 2004).
We used a depreciation factor (δ) of 40 percent to
account for the fact that older experience is less
useful than more recent experience (Macher and
Boerner, 2006):
Interlocking_Directors_Experienceimt
=
Director_Experiencedimt
d
+δ×
Director_Experiencedimt−1
d
+ δ2 ×
Director_Experiencedimt−2
d
New-product development experience
Our measure of new-product development experience was constructed by counting the number of
new drugs the focal firm had developed in the
recent three-year window. We used a depreciation factor of 40 percent to calculate this firm-level
aggregated measure of experience (Macher and
Boerner, 2006).
Copyright © 2013 John Wiley & Sons, Ltd.
347
Market overlap
We followed prior studies’ methodology to create
a measure of ex ante market overlap between
focal firm i and all other (incumbent) interlocking
firms (Dowell, 2006). First, we used Sohn’s (2001)
formula to create a dyad measure of overlap
between firm i and each interlocked firm j:
2
ximt min ximt , xjmt /
ximt.
Cijt =
m
m
In this equation, ximt and xjmt are the number of
drugs that firms i and j offered in market m in year
t, respectively. Second, because a focal firm might
be interlocked with more than one incumbent firm,
we created an overall measure of market overlap
at the focal-firm level by averaging all the dyadlevel overlap scores between firm i and all the
incumbent interlocked firms. This final variable
can take a value between 0 and 1, where 0 indicates
that the focal firm’s drugs are in markets in which
the incumbent interlocked firms have no presence,
and 1 indicates that the incumbent interlocked
firms have as many drugs as the focal firm in the
markets in which the focal firm is active.
Control variables
The following two controls were included only
in the models where we examined the likelihood
of new-director appointment: potential director
new ties and market overlap. The first control
is a measure of the number of firms that are
interlocked with the focal firm but in which
the potential director does not sit. The second
control captures the degree of market overlap
between the focal firm and the firm(s) where
such potential director currently serves (using the
same procedure described earlier for the market
overlap independent variable). In addition, we
included the following controls only in the models
where we examined the likelihood of new-market
entry: directors’ experience from past interlocks
and patent applicability in focal therapeutic area.
We included a measure of the experience of past
interlocks by looking at the experience directors
had obtained in other boards in the past; i.e.,
we followed the same procedure used to create
the measure of interlocking directors’ experience
but for interlocks that were not active anymore
in year t. Second, because entry might be more
Strat. Mgmt. J., 36: 339–359 (2015)
DOI: 10.1002/smj
348
L. Diestre, N. Rajagopalan, and S. Dutta
likely if it is under consideration, we included a
control for whether the firm was considering entry
into the focal market, measured as the number of
patents that the focal firm had obtained in the last
five years that were applicable to the therapeutic
market in question.
Finally, the following control variables were
included in both director-appointment and newmarket entry models. First, consistent with prior
studies of new-market entry (Dowell and Killaly,
2009; King and Tucci, 2002), we included three
market-level variables that could impact both, the
intention and the likelihood that a firm will enter a
new market: the market’s natural log of total sales,
sales growth (salest /salest-1 ), and a measure of that
market’s intellectual property strength created by
dividing the number of patents in that therapeutic
area (obtained by all firms in this industry) that
were expiring in the following five years by the
number of patents for that therapeutic area that
were granted in the previous five years (Somaya,
2003).
Second, we included the following firm-level
variables to capture firms’ drug-development
resources, which may affect new-director appointment and new-market entry decisions (Ahuja and
Katila, 2001; Cassiman and Veugelers, 2006;
Rothaermel and Deeds, 2004): the natural logarithm of the number of patents applicable in other
markets granted in the previous five years, the total
number of drugs that the focal firm had already
developed for other markets, the amount of funds
invested in corporate venture capital (CVC) activities in the last three years, the number of alliances
that the focal firm had established with firms that
are not active in the focal therapeutic market in
the recent three-year window, the firm’s financial
performance (return on assets), the firm’s therapeutic area diversity (1 – (TAjt )2 , where TAjt is
the proportion of drugs in therapeutic area j in year
t), R&D intensity (R&D expenditures over sales),
firm size (the natural logarithm of firm sales),
firm leverage (debt over equity), and firm slack
(cash and short-term investments over a firm’s
assets).
Finally, we included several additional controls
to capture the board’s monitoring role as well as
the firm’s corporate governance profile that has
been shown in prior research to affect director
appointment and/or firms’ innovation-related decisions (Hoskisson et al., 2002; Withers et al., 2012).
We controlled for the total number of interlocking
Copyright © 2013 John Wiley & Sons, Ltd.
directors, the number of annual board meetings,
the proportion of outside directors, board size (total
number of directors), directors’ average tenure
(average number of years that current directors
have been on the focal firm’s board), and directors’ average age (Carpenter and Westphal, 2001;
Kor, 2006).
Analysis
For our first dependent variable (likelihood of
new-director appointment), we examined the
impact of the explanatory variables in year t-1 on
the likelihood of new-director appointment in year
t. Our second dependent variable (new-market
entry) was measured at the time when a new drug
targeted at a specific market entered pre-clinical
trials, but the decision to enter a given therapeutic
market is made by a firm, on average, about
two years before the drug enters pre-clinical trials
(PhRMA, 2007). Therefore, in order to account
for this delay, we used independent and control
variables’ values in year t-2 to explain newmarket entry in year t. That is, we examined
new-market entry in the 2000–2006 period
as a function of explanatory variables in the
1998–2004 period.
Consistent with recent research, we relied
on discrete-time event-history analysis (Dowell
and Killaly, 2009; King and Tucci, 2002). This
methodology allows us to deal with right-censored
observations (firms that had not appointed a new
director or entered a new market in the last year
of analysis) and considers a firm-director and a
firm-market observation at risk of event occurrence
in a given year as long as the firm is still alive
and has not yet appointed such director or entered
that market (Dowell and Killaly, 2009; King and
Tucci, 2002). We thus defined the conditional probability that firm i undertook a particular action
(appointed director d or entered market m) in
year t as
Prob [APPidt = 1] = Pr Tid = t | Tid ≥ t, xidt−1 ,
Prob [ENTRYimt = 1]
= Pr Tim = t | Tim ≥ t, ximt−2 ,
where Tid and Tim are the discrete random variables that provide the times of appointment and
entry respectively, and xidt-1 and ximt-2 are the
Strat. Mgmt. J., 36: 339–359 (2015)
DOI: 10.1002/smj
Interlocking Directors and New-Market Entry
vectors of explanatory variables. Because these
conditional probabilities can be estimated using
common maximum-likelihood methods (Allison,
1982), we used a logit model to estimate the probability that our dependent variables (APPidt and
ENTRYimt ) took a value of 1 as a function of the
independent and control variables described above
(Dowell and Killaly, 2009; King and Tucci, 2002).
The advantage of this methodology is that observations at different points in time are independent, providing unbiased standard errors (Allison,
1982). Yet, our study differed from others in that
we allowed for appointments of several directors
and entry into several markets simultaneously. To
the extent that the decision to appoint one specific director (or enter a specific market) might
not be independent from the decision to appoint
some other director (or enter some other market)
the assumption of independence across observations might be violated (Dowell and Killaly, 2009;
Greene, 2003). Therefore, we followed Dowell
and Killaly (2009) and estimated the model using
the method of generalized estimating equations
(GEE) to account for dependence across observations for the same firm (Liang and Zeger, 1986).
In addition, we included year fixed-effects to control for unobserved heterogeneity from temporal
effects.
An important characteristic of our sample for the
first test (likelihood of new-director appointment)
is that, because we look at all possible combinations between all the firms and all the directors in
our sample, the number of events (observations in
which our dependent variable took a value of 1)
is dramatically smaller than the number of nonevents. Specifically, our dependent variable took
a value of 1 in 41 out of 1,246,791 observations
(0.003%). Because estimating event occurrence
in these cases is problematic we adopted a statebased sampling technique (Manski and McFadden,
1981). This methodology consists of selecting all
the appointment observations (where APPidt = 1)
but only a random sample of the nonappointments
(where APPidt = 0). Accordingly, we randomly
selected 0.4 percent of nonappointments, resulting
in a final sample of 5,028 observations (41
appointments and 4,987 nonappointments). This
procedure provides an unbiased and more efficient
estimation (only the intercept is biased and we corrected it following Manski and McFadden’s [1981]
technique).
Copyright © 2013 John Wiley & Sons, Ltd.
349
RESULTS
Tables 1 and 2 display descriptive statistics
and correlations for all the variables. There
were some significantly high correlations between
some market-level control variables (e.g., the
correlations between market total sales and market
sales growth), as well as some firm-level control
variables (e.g., firm alliances, firm size, and firm’s
total drugs). We decided to keep these control
variables in the estimations reported below, but
we also re-estimated all our regressions without
these controls and the results provided very similar
statistical support for our hypotheses. Moreover,
all independent variables were mean-centered prior
to the creation of the interaction terms in order to
avoid further multi-collinearity problems (Aiken
and West, 1991).
Likelihood of new-director appointment:
Hypotheses 1, 3 and 4
Logistic regression estimations of the likelihood of
new-director appointment are presented in Table 3.
In model 1 we included only the control variables. In model 2 we added the variable potential director’s experience to test Hypothesis 1.
Overall, the incremental variance explained by
model 2 over model 1 was highly significant
(χ 2 = 18.4, p < 0.001). More specifically, consistent with Hypothesis 1, we found that the
coefficient was positive and significant (β = 0.27,
p < 0.001), suggesting that the greater the experience of a director in the markets the focal firm is
considering entering, the greater the likelihood the
director will join the focal firm’s board.
In model 3 we added the main effects of financial restatements and relative status. The incremental variance explained by model 3 over model
2 was not significant (χ 2 = 0.6, n.s.), nor were
the coefficients of the added explanatory variables
significant. In model 4 we included the two interaction effects. The incremental variance explained
by model 4 over model 3 was significant (χ 2 = 6.0,
p < 0.05). In addition, we found significant coefficients for both interaction effects. First, the
coefficient of the interaction between potential director’s experience and financial restatements was negative and significant as predicted
(β = −0.81, p < 0.001), suggesting that marketspecific experience of a potential director had a
weaker effect on the likelihood of appointment as
Strat. Mgmt. J., 36: 339–359 (2015)
DOI: 10.1002/smj
Copyright © 2013 John Wiley & Sons, Ltd.
Firm leverage
Slack
Focal firm interlocks
Board meetings
Proportion of
outsiders
Board size
Directors’ tenure
Directors’ age
18
19
20
21
22
23
24
25
0.007
0.03
0.42
57.7
7.55
7.73
0.82
7.25
0.95
129
1.25
2.82
13.2
0.53
−0.33
2.42
0.15
1.33
3.25
0.08
1.03
7.91
0.32
1.13
−1.12
Significance level: *p < 0.05
R&D intensity
Therapeutic area
diversity
15
Firm size
Firm
performance
14
16
Alliances
13
17
Firm’s total drugs
Patent applicability
in other TAs
10
CVC investment
Market intellectual
property strength
9
11
Market sales growth
8
12
Market overlap
Market total sales
6
Potential director new
ties
5
7
Financial restatements
Relative status
3
4
Director appointment
Potential director’s
experience
1
0.18*
1.00
1
0.01
1.00
2
1.00
3
0.25*
0.02
0.17*
0.76
24.1
0.01
0.04*
0.11*
0.20*
0.14*
0.01
0.04*
0.13*
0.11*
0.35*
0.04*
0.08 −0.01 −0.03*
1.63 −0.01 −0.01
2.79 −0.01 −0.01
4.28 −0.01
0.02
0.43*
3.20 −0.01 −0.01
0.18*
0.09*
0.02 −0.04*
0.07* −0.13*
0.11* −0.08* −0.05* −0.01 −0.08*
0.15*
0.13*
0.52*
0.05*
0.06*
0.03*
0.09*
0.28*
0.57*
0.06*
0.11* −0.04*
0.10* −0.07*
0.10* −0.05* −0.09* −0.08* −0.07*
0.08* −0.14*
0.14*
0.04* −0.05*
0.08*
0.07* −0.14*
0.56*
0.31*
0.01 −0.08*
0.28* −0.03* −0.02 −0.03* −0.01
0.01 −0.14*
0.01 −0.06* −0.06*
0.01
0.11*
0.32*
0.36*
0.10*
0.25*
1.00
10
0.01 −0.01 −0.01
0.01 −0.16*
0.04* −0.08* −0.10* −0.06* −0.09*
0.09* −0.11*
0.05* −0.04*
0.01 −0.03* −0.01 −0.09* −0.01 −0.08* −0.19*
0.11*
1.00
9
0.01 −0.14* −0.12* −0.02 −0.02
0.30* −0.21* −0.12* −0.22*
0.57 −0.01 −0.02 −0.02 −0.04*
−0.01
−0.01 −0.02 −0.10*
0.10*
1.00
0.50* −0.23*
0.01 −0.05* −0.04*
0.01 −0.01 −0.03 −0.03* −0.02 −0.02
0.01 −0.01
1.93 −0.01 −0.03
42.3
0.26
0.30 −0.01 −0.01
0.01
8
0.05* −0.03 −0.09* −0.15* −0.10*
0.14*
1.00
7
0.01 −0.46*
0.01
1.00
6
0.35* −0.09* −0.13* −0.24*
0.24*
0.09*
0.01 −0.01 −0.04*
0.01 −0.01 −0.02
3.90 −0.01 −0.02* −0.02
1.43
0.21*
0.07*
0.03* −0.10*
0.02 −0.02* −0.09*
0.09* −0.22*
0.08*
0.15*
0.04* −0.15*
0.03*
0.01
0.19* −0.03* −0.46*
5
1.00
1.00
4
0.01 −0.01 −0.15* −0.05*
1.18 −0.02 −0.04*
0.11
0.64
2.08
0.35
0.57
1.28 −0.01 −0.25* −0.03*
0.13 −0.01
1.50
0.09
s.d.
894
Mean
0.15*
0.42*
1.00
13
0.01
0.19*
0.24*
0.66*
0.10*
0.13*
0.22*
0.07*
0.05*
0.10*
0.04*
0.07*
0.16*
0.22*
0.31*
0.01
0.10*
0.01 −0.09*
0.12* −0.01
0.05*
0.19*
1.00
14
1.00
15
0.21* −0.32*
1.00
16
0.27*
0.38*
0.30*
0.06*
0.14*
0.04*
0.11*
0.07*
0.16* −0.04*
1.00
19
1.00
20
0.40*
0.32*
0.14* −0.28*
0.39*
0.04*
0.01
0.20* −0.10*
0.12*
0.04*
0.08* −0.04* −0.06*
0.04*
0.02
0.14*
0.20*
0.14* −0.23* −0.05* −0.01
0.10* −0.22*
0.38* −0.08*
0.15*
1.00
18
0.01 −0.01
0.29*
1.00
17
0.06* −0.18*
0.27* −0.10*
0.01
0.03* −0.03*
0.12* −0.01 −0.01
0.67*
0.06* −0.08* −0.23* −0.16*
0.03*
0.10*
0.24*
1.00
12
0.05* −0.01 −0.04*
0.20*
0.49*
0.12*
0.28*
0.40*
0.60*
0.18*
1.00
11
Descriptive statistics and correlations for the likelihood of new-director appointment sample (n = 5,028)
2
Table 1.
0.23*
1.00
22
0.15*
0.25*
0.15* −0.01
0.07*
0.32*
1.00
21
0.05*
0.07*
1.00
23
25
0.47* 1.00
1.00
24
350
L. Diestre, N. Rajagopalan, and S. Dutta
Strat. Mgmt. J., 36: 339–359 (2015)
DOI: 10.1002/smj
Copyright © 2013 John Wiley & Sons, Ltd.
Directors’ age
25
Significance level: *p < 0.05
Directors’ tenure
24
Board meetings
21
Board size
Focal firm interlocks
20
Proportion of outsiders
Slack
19
23
Firm leverage
18
22
R&D intensity
Firm size
16
17
Therapeutic area
diversity
Patent applicability in
other TAs
10
15
Patent applicability in
focal TA
9
Firm performance
Market intellectual
property strength
8
14
Market sales growth
7
Alliances
Market total sales
6
13
Directors’ experience
from past interlocks
5
Firm’s total drugs
Market overlap
4
CVC investment
New-product
development
experience
3
11
Interlocking directors’
experience
12
New-market entry
2
57.8
7.46
7.31
0.77
7.16
0.76
142
2
3
0.02 −0.03* 1.00
0.05* 1.00
1.00
1
4
2.21
66.4
0.29
6
8
9
10
0.08* 0.10* 0.02
0.01
0.02 −0.01
0.17* −0.01 −0.01
0.01
0.01 −0.02
−0.02* −0.01 −0.02
0.01
0.02
−0.04* 0.01 −0.01
4.75
3.53
1.82
0.12
3.34
0.05* 0.02
16
17
0.03* 0.02* 0.06* −0.01
0.06* −0.07* 0.06* −0.09* 0.03* 0.17* −0.01
0.02* −0.01
0.04* 1.00
18
1.00
19
0.11* 0.06* 0.01
0.01
0.08* −0.01
1.00
20
21
0.19* 0.07* 0.21* 1.00
23
24
0.04* 0.04* 0.09* −0.10* 0.06* 0.06* 0.12* 0.18* 0.03* 0.17* −0.01
0.10* 0.01
25
0.19* 0.01 −0.03* 0.09* 0.11* 0.11* 0.06* 0.41* 1.00
0.04* −0.05* 0.02* 0.13* 0.12* 0.12* 0.05* 0.13* 0.15* 0.09* −0.09* 0.41* 0.01 −0.04* −0.13* −0.08* −0.13* 0.03* 1.00
0.25* 0.38* 0.40* 0.09* 0.34* 0.19* 0.32* −0.12* 0.45* 0.04* 0.02
22
0.33* 0.09* 1.00
0.08* −0.04* −0.02* 0.03* 1.00
0.04* −0.03* 0.12* −0.04* −0.13* 0.04* 0.01
0.02* 0.01 −0.01 −0.02* 0.05* 0.02* −0.01
0.04* 0.02* 0.03* −0.01
0.23* 0.47* 0.54* 0.17* 0.55* 0.43* 0.37* −0.21* 1.00
0.01 −0.01
0.01
0.03* −0.01 −0.03* −0.01 −0.01
0.03* 0.02 −0.03* −0.07* −0.01
0.01
15
0.16* 0.31* 0.48* 0.04* 0.33* 0.18* 1.00
0.14* 0.16* 0.18* 0.05* 0.16* 1.00
14
0.09* 0.03* 0.16* 0.03* 0.07* −0.08* 0.06* 0.15* 0.07* 0.16* 0.05* 0.07* 0.14* 0.15* 0.03* 0.10* −0.05* 0.02
0.11* 0.07* 0.01
0.01
0.02* 0.02* −0.01
13
0.22* 0.41* 0.60* 0.15* 1.00
0.11* 0.14* 0.09* 1.00
12
0.01 −0.06* −0.05* −0.01 −0.01 −0.07* −0.17* −0.08* 1.00
0.05* −0.01
0.01
0.16* −0.04* 0.01 −0.09* −0.01 −0.03* −0.01 −0.02
−0.03* −0.01 −0.01 −0.04* −0.01
0.01
0.03* 0.04* 0.01 −0.01 −0.01
0.12* −0.03* 0.12* 0.05* 0.01 −0.01 −0.04* −0.01
0.10* 0.04* 0.06* 0.05* 0.02
11
0.09* −0.16* 0.06* 0.15* 0.37* 1.00
0.06* −0.01 −0.01 −0.04* 0.01 −0.01 −0.01
0.06* −0.01
0.12* 0.06* 0.01 −0.03* 0.02* −0.08* 0.04* −0.05* 0.32* 1.00
0.07* 1.00
0.21* −0.03* 0.05* 0.06* 0.49* −0.23* 1.00
0.10* 0.15* 0.06* 0.11* 0.05* 0.09* 0.01
0.02
0.02 −0.07* 0.03* −0.07* −0.03* −0.69* 1.00
7
0.59 −0.03* 0.25* 0.04* 0.39* 0.08* 0.06* −0.07* 0.05* 0.22* 0.10* 0.12* −0.01
887
0.02* 1.00
5
0.04* 0.18* −0.03* 0.07* 0.07* 1.00
0.03* 0.13* −0.01
0.83 −0.05* −0.01
3.74
3.10
1.02
1.00
1.11
0.09
0.90
2.07
0.16
0.22 −0.06* 0.10* 0.07* 1.00
1.33
2.19
0.23
s.d.
0.10 12.1
3.10
12.3
0.53
−0.36
2.37
0.30
2.71
2.93
0.81
0.06
1.26
7.38
0.02
0.15
0.31
0.57
0.06
Mean
Descriptive statistics and correlations for the likelihood of new-market entry sample (n = 8,876)
1
Table 2.
Interlocking Directors and New-Market Entry
351
Strat. Mgmt. J., 36: 339–359 (2015)
DOI: 10.1002/smj
352
L. Diestre, N. Rajagopalan, and S. Dutta
the focal firm’s involvement with financial restatements increased. Second, the coefficient of the
interaction between potential director’s experience
and relative status was positive and significant
(β = 0.12, p < 0.05), implying that the effect of
market-specific experience of a potential director
on the likelihood of being appointed was more positive the greater the status of the focal firm relative
to that director’s current firm. We interpret these
results as support for Hypotheses 3 and 4.
Likelihood of new-market entry: Hypotheses 2,
5 and 6
Logistic regression estimations of the likelihood
of new-market entry are presented in Table 4.
In model 1 we included the control variables.
In model 2 we added the variable interlocking
directors’ experience to test Hypothesis 2. Overall,
the incremental variance explained by model 2
over model 1 was significant (χ 2 = 4.5, p < 0.05).
More specifically, consistent with Hypothesis 2,
we found that the coefficient was positive and
significant (β = 0.04, p < 0.05), suggesting that a
greater level of market-specific experience among
interlocking directors increases the likelihood that
the firm will enter that therapeutic market.
In model 3 we added the main effects of newproduct development experience and market overlap. While the incremental variance explained by
model 3 over model 2 was significant (χ 2 = 7.9,
p < 0.05), only the main effect of market overlap was negative and significant (β = −1.09,
p < 0.01). In model 4 we included both interaction effects. The incremental variance explained by
model 4 over model 3 was significant (χ 2 = 6.4,
p < 0.05). Overall, we found significant coefficients for both interaction effects. First, the
coefficient of the interaction between interlocking directors’ experience and new-product development experience was positive and significant
(β = 0.02, p < 0.05), indicating that the positive
effect of directors’ market-specific experience on
the likelihood of entry in a particular market was
amplified by the presence of new-product development experience. This result is consistent with
Hypothesis 5. Second, the coefficient of the interaction between interlocking directors’ experience
and market overlap was negative and significant
(β = −0.25, p < 0.01), suggesting that marketspecific experience of interlocking directors had
a weaker effect on the likelihood of entry when
Copyright © 2013 John Wiley & Sons, Ltd.
the degree of market overlap between the focal
and the incumbent firms was high. This finding
provides support for Hypothesis 6.
Overall, the results provided in Tables 3 and
4 supported all four moderating hypotheses. Yet,
it is important to acknowledge that for nonlinear
parametric estimations the true interaction effect
between two variables is determined not simply
by the coefficient of the interaction term but also
by the values of all other variables in the model
(Hoetker, 2007; Wiersema and Bowen, 2009).
Hence, we estimated the real effects of these
interactions using the mean values for all other
variables and the vector of coefficients estimated in
the full-model specifications (model 4) of Tables 3
and 4 (Hoetker, 2007; Wiersema and Bowen,
2009).
First, we found that increasing potential director’s experience by one standard deviation from
its mean value resulted in an increase in the likelihood of new-director appointment by 79 percent
for low levels of financial restatements (one standard deviation below the mean), yet that same
increase in the potential director’s experience
resulted only in a 23.7 percent increase in the
likelihood of new-director appointment for high
levels of financial restatements (one standard deviation above the mean). Similarly, a standard
deviation increase in the potential directors’ experience from its mean value increased the likelihood of new-director appointment by 105 percent
for high levels of relative status (one standard
deviation above the mean), yet it increased the
likelihood of new-director appointment by only
18.4 percent for low levels of relative status (one
standard deviation below the mean). In addition,
we found that a standard deviation increase in
interlocking directors’ experience increased the
likelihood of new-market entry by 60.2 percent for
high levels of new-product development experience (one standard deviation above the mean), yet
increased the likelihood of new-market entry by
only 23.7 percent for low levels of new-product
development experience (one standard deviation
below the mean). Finally, we found that increasing
interlocking directors’ experience by one standard
deviation led to an increase in the likelihood of
new-market entry by 79.3 percent for low levels
of market overlap (one standard deviation below
the mean), yet resulted in a 16.4 percent increase
in the likelihood of entry for high levels of market
overlap (one standard deviation above the mean).
Strat. Mgmt. J., 36: 339–359 (2015)
DOI: 10.1002/smj
Interlocking Directors and New-Market Entry
Table 3.
353
Event history analysis of new-director appointmenta,b
Intercept
Model 1
Model 2
Model 3
Model 4
Nonexecutive
directors only
−18.4***
(2.02)
−16.5***
(1.90)
0.27***
(0.05)
−16.3***
(1.89)
0.29***
(0.05)
−0.11
(0.73)
0.22
(0.17)
−16.2***
(2.43)
0.44**
(0.13)
0.03
(0.68)
0.15
(0.16)
−0.81***
(0.20)
−13.3**
(2.60)
0.45**
(0.15)
0.06
(0.78)
0.16
(0.18)
−0.83***
(0.24)
0.12*
(0.06)
0.43
(0.43)
−0.14
(0.54)
0.81***
(0.17)
1.93***
(0.28)
−3.28***
(0.97)
−0.29*
(0.15)
0.02
(0.19)
−0.29
(0.24)
0.09*
(0.04)
−0.09
(0.31)
0.43
(0.57)
0.005†
(0.003)
−0.02†
(0.01)
0.002
(0.004)
−0.003†
(0.002)
−0.60*
(0.27)
0.02
(0.04)
0.41
(1.17)
0.15
(0.10)
0.02
(0.06)
0.14*
(0.07)
0.58
(0.49)
0.05
(0.60)
0.64***
(0.14)
1.62***
(0.25)
−2.62**
(0.81)
−0.24
(0.16)
0.04
(0.24)
−0.26
(0.21)
0.09*
(0.04)
0.01
(0.35)
−0.08
(0.57)
0.004
(0.003)
−0.02†
(0.01)
0.001
(0.004)
−0.002†
(0.001)
−0.80*
(0.36)
0.02
(0.05)
0.08
(1.24)
0.13
(0.12)
0.05
(0.07)
Potential director’s experience
−
Financial restatements
−
−
Relative status
−
−
Potential director’s
experience × financial
restatements
Potential director’s
experience × relative status
Potential director new ties
−
−
−
−
−
−
Market overlap
Market total sales
Market sales growth
Market intellectual property
strength
Patent applicability in other TAs
Firm’s total drugs
CVC investment
Alliances
Firm performance
Therapeutic area diversity
R&D intensity
Firm size
Firm leverage
Slack
Focal firm interlocks
Board meetings
Proportion of outsiders
Board size
Directors’ tenure
Copyright © 2013 John Wiley & Sons, Ltd.
0.10
(0.29)
0.35
(0.45)
0.97***
(0.15)
1.96***
(0.27)
−2.43***
(0.79)
−0.16
(0.11)
0.27†
(0.15)
−0.64†
(0.40)
0.07*
(0.03)
−0.25
(0.31)
0.52
(0.52)
0.003
(0.002)
−0.02†
(0.01)
0.002
(0.003)
−0.004†
(0.002)
−0.33†
(0.17)
−0.01
(0.03)
0.59
(1.13)
0.08
(0.08)
0.01
(0.05)
0.28
(0.36)
−0.58
(0.51)
0.81***
(0.15)
1.81***
(0.27)
−3.32***
(0.88)
−0.16
(0.12)
0.16
(0.18)
−0.87†
(0.46)
0.10**
(0.04)
−0.20
(0.28)
0.69
(0.57)
0.005†
(0.003)
−0.02†
(0.01)
0.003
(0.003)
−0.004
(0.003)
−0.32†
(0.19)
−0.01
(0.03)
1.43
(1.43)
0.08
(0.08)
0.01
(0.05)
0.26
(0.37)
−0.24
(0.63)
0.82***
(0.15)
1.82***
(0.27)
−3.33***
(0.91)
−0.20†
(0.12)
0.15
(0.18)
−0.81†
(0.45)
0.09*
(0.04)
−0.20
(0.28)
0.55
(0.57)
0.004
(0.003)
−0.02*
(0.01)
0.004
(0.003)
−0.003
(0.002)
−0.37†
(0.20)
0.01
(0.04)
1.44
(1.50)
0.09
(0.10)
0.01
(0.06)
Strat. Mgmt. J., 36: 339–359 (2015)
DOI: 10.1002/smj
354
L. Diestre, N. Rajagopalan, and S. Dutta
Table 3.
Continued
Directors’ age
N
Pearson Chi-square
LR (χ 2 )
Model 1
Model 2
Model 3
Model 4
−0.05†
(0.03)
5,028
213.6
−
−0.07*
(0.03)
5,028
195.2
18.4***
−0.07*
(0.03)
5,028
194.6
0.6
−0.06†
(0.03)
5,028
188.6
6.0*
Nonexecutive
directors only
−0.08*
(0.04)
4,446
170.4
−
Significance levels: ***p < 0.001; **p < 0.01; *p < 0.05; † p < 0.10
a Likelihood ratio (LR) values test for the increment in the overall model fit after including additional variables.
b All models include year dummies, and all models are estimated using generalized estimating equations (GEE).
Overall, we interpret these findings as additional
support for our moderating Hypotheses 3–6.
Robustness tests
To increase the reliability of our findings we
conducted the following robustness tests. First,
an alternative explanation for our moderating
hypotheses with the first dependent variable
(Hypotheses 3 and 4), could be that the decision
not to join specific boards is based not on the director’s personal benefits or costs, but on whether
such a move benefits (or not) the incumbent firm
where such director currently serves. To rule out
this alternative explanation, we replicated our tests
with a measure that only captured the experience
of nonexecutive directors who, unlike executive
directors, are less likely to be driven by the firm’s
preferences. The last model of Table 3 provides
the results of this analysis and shows that our
empirical findings remain robust to this restriction.
The coefficient of the interaction between potential director’s experience and financial restatements was still negative and significant (β = -0.83,
p < 0.001), whereas the coefficient of the interaction between potential director’s experience and
relative status remained positive and significant
(β = 0.14, p < 0.05).
In addition, our estimations of the effect of
interlocking directors’ experience on the likelihood of new-market entry may be subject to
a reverse causality problem—firms that have
already decided to enter a market create these
interlocks, not because they intend to use these
directors’ expertise but as a way to gain legitimacy. In order to assess whether our results
were driven by reverse causality, we created two
alternative measures of interlocking directors’
Copyright © 2013 John Wiley & Sons, Ltd.
experience: one that accounted only for the experience of directors who had been on the focal
firm’s board for at least six years and a second one
that accounted only for the experience of directors who had been on the incumbent firm’s board
for at least six years. In the last two columns
of Table 4 we see that the interactions between
interlocking directors’ experience and new-product
development experience remain positive and significant for both measures of experience (β = 0.02,
p < 0.05; β = 0.02, p < 0.05). Similarly, the interactions between interlocking directors’ experience
and market overlap remain negative and significant
for both measures (β = -0.21, p < 0.01; β = -0.24,
p < 0.01). These additional findings increase our
confidence in the validity of our conclusions.
DISCUSSION
The purpose of this study was to improve our
understanding of the effects of interlocking directorships on new-market entries by answering the
following questions. First, what is the effect of
interlocked directors’ market-specific experience
on the likelihood of new-director appointment and
new-market entry? Second, what specific constraints do firms face in acquiring experienced
directors and utilizing their expertise to enter a
new market?
Our findings suggest that firms considering
entering new markets are more likely to appoint
experienced directors and that the presence of
experienced directors increases the likelihood of
new-market entry. Yet, our study also reveals that
firms face important, albeit different constraints
when it comes to, first appointing experienced
directors and second, utilizing these directors’
Strat. Mgmt. J., 36: 339–359 (2015)
DOI: 10.1002/smj
Interlocking Directors and New-Market Entry
Table 4.
355
Event history analysis of new-market entrya,b
Model 1
Intercept
Interlocking directors’
experience
New-product development
experience
Market overlap
Interlocking directors’
experience × new-product
development experience
Interlocking directors’
experience × market
overlap
Directors’ experience from
past interlocks
Market total sales
Market sales growth
Market intellectual property
strength
Patent applicability in focal
TA
Patent applicability in other
TAs
Firm’s total drugs
CVC investment
Alliances
Firm performance
Therapeutic area diversity
R&D intensity
Firm size
Firm leverage
Slack
Focal firm interlocks
Board meetings
Proportion of outsiders
Board size
Directors’ tenure
Model 2
Model 3
Model 4
−7.81*** −7.60*** −7.90*** −7.78***
(1.24)
(1.26)
(1.26)
(1.26)
0.04*
0.05**
0.09***
−
(0.02)
(0.02)
(0.02)
0.05
0.05
−
−
(0.03)
(0.04)
−1.09** −0.90*
–
−
(0.36)
(0.37)
0.02*
−
−
−
(0.01)
−
0.27
(0.16)
0.54***
(0.06)
0.62***
(0.09)
0.35
(0.62)
0.74***
(0.17)
−0.01
(0.09)
−0.20
(0.14)
0.03**
(0.01)
0.06**
(0.02)
0.12
(0.17)
1.56***
(0.34)
−0.007
(0.007)
0.001
(0.001)
−0.013**
(0.005)
−0.003
(0.002)
−0.14
(0.13)
0.04*
(0.02)
−0.32
(0.56)
0.08*
(0.04)
0.02
(0.02)
Copyright © 2013 John Wiley & Sons, Ltd.
−
0.23
(0.16)
0.53***
(0.06)
0.60***
(0.09)
0.18
(0.63)
0.73***
(0.17)
−0.02
(0.09)
−0.18
(0.14)
0.03**
(0.01)
0.06**
(0.02)
0.12
(0.17)
1.52***
(0.34)
−0.007
(0.007)
0.001
(0.001)
−0.013**
(0.005)
−0.003
(0.002)
−0.20
(0.13)
0.04*
(0.02)
−0.28
(0.56)
0.07*
(0.04)
0.02
(0.02)
−
0.22
(0.16)
0.53***
(0.06)
0.60***
(0.09)
0.17
(0.64)
0.73***
(0.17)
−0.02
(0.09)
−0.19
(0.13)
0.03**
(0.01)
0.06**
(0.02)
0.14
(0.18)
1.52***
(0.33)
−0.007
(0.007)
0.001
(0.001)
−0.013**
(0.005)
−0.003
(0.002)
−0.08
(0.13)
0.04*
(0.02)
−0.21
(0.56)
0.07*
(0.04)
0.01
(0.02)
Tenure at focal
firm > six years
Tenure at incumbent
firm > six years
−7.85***
(1.26)
0.08***
(0.02)
0.05
(0.03)
−0.94*
(0.37)
0.02*
(0.01)
−7.81***
(1.26)
0.08***
(0.02)
0.05
(0.03)
−0.90*
(0.37)
0.02*
(0.01)
−0.25**
(0.08)
−0.21**
(0.08)
−0.24**
(0.08)
0.16
(0.17)
0.56***
(0.03)
0.60***
(0.09)
0.07
(0.65)
0.73***
(0.17)
−0.01
(0.09)
−0.18
(0.13)
0.03**
(0.01)
0.06**
(0.02)
0.15
(0.19)
1.54***
(0.33)
−0.007
(0.007)
0.001
(0.001)
−0.013**
(0.005)
−0.003
(0.002)
−0.13
(0.13)
0.04*
(0.02)
−0.22
(0.56)
0.08*
(0.04)
0.02
(0.02)
0.17
(0.17)
0.53***
(0.06)
0.60***
(0.09)
0.14
(0.64)
0.73***
(0.17)
−0.01
(0.08)
−0.19
(0.13)
0.03**
(0.01)
0.06**
(0.02)
0.15
(0.19)
1.53***
(0.33)
−0.007
(0.007)
0.001
(0.001)
−0.013**
(0.005)
−0.003
(0.002)
−0.11
(0.13)
0.04*
(0.02)
−0.22
(0.56)
0.08*
(0.04)
0.02
(0.02)
0.17
(0.17)
0.53***
(0.06)
0.60***
(0.09)
0.10
(0.65)
0.74***
(0.17)
−0.01
(0.09)
−0.19
(0.13)
0.03**
(0.01)
0.06**
(0.02)
0.15
(0.19)
1.54***
(0.33)
−0.007
(0.007)
0.001
(0.001)
−0.013**
(0.005)
−0.003
(0.002)
−0.12
(0.13)
0.04*
(0.02)
−0.22
(0.56)
0.08*
(0.04)
0.02
(0.02)
Strat. Mgmt. J., 36: 339–359 (2015)
DOI: 10.1002/smj
356
L. Diestre, N. Rajagopalan, and S. Dutta
Table 4.
Continued
Directors’ age
N
Pearson Chi-square
LR (χ 2 )
Model 1
Model 2
Model 3
Model 4
Tenure at focal
firm > six years
Tenure at incumbent
firm > six years
−0.01
(0.02)
8,876
1,652.4
−
−0.01
(0.02)
8,876
1,647.9
4.5*
−0.01
(0.02)
8,876
1,640.0
7.9*
−0.01
(0.02)
8,876
1,633.6
6.4*
−0.01
(0.02)
8,876
1,636.6
−
−0.01
(0.02)
8,876
1,634.8
−
Significance levels: ***p < 0.001; **p < 0.01; *p < 0.05; † p < 0.10
a
Likelihood ratio (LR) values test for the increment in the overall model fit after including additional variables.
b
All models include year dummies, and all models are estimated using generalized estimating equations (GEE).
knowledge. First, we found that directors’ market
experience is less likely to increase the probability
of new-director appointment for focal firms that
have a bad reputation (as reflected in recent
financial restatements) and that have a relatively
lower status than the incumbent firms where
those directors currently serve. Second, we found
that interlocking directors’ market experience has
a weaker impact on the likelihood of newmarket entry for focal firms that lack new-product
development experience and for focal firms that
exhibit a high degree of market overlap with
interlocked firms.
Implications for theory and practice
We believe that our study makes several theoretical
and empirical contributions to the existing literature. First, our study attends to recent calls in
the literature to consider the constraints firms face
when trying to attract (Withers et al., 2012) as
well as utilize directors’ experience (Shropshire,
2010). Withers et al. (2012), for instance, point
out that little is known about directors’ motivations to join (or not) specific boards. We contribute to this stream of research by theorizing
about not only the firm’s motivation to attract
specific directors, but also directors’ own preferences. This is one of the first studies to consider
simultaneously both, demand-side (firm-level) and
supply-side (director-level) factors in directorship
markets (Withers et al., 2012). Our study demonstrates that experienced directors are more likely
to join boards of firms with greater status and
less likely to join the boards of firms that had
reported recent financial restatements. These findings suggest that conflicts of interest and potential reputational spillovers strongly influence directors’ motivations to join corporate boards. In
Copyright © 2013 John Wiley & Sons, Ltd.
addition, we identify two crucial firm-level contingencies that can constrain a firm’s ability to
leverage successfully its directors’ market-specific
experience—the focal firm’s past new-product
development experience (reflective perhaps of the
firm’s absorptive capacity) and the degree of market overlap between the focal and incumbent firms
(indicative of reluctance to provoke regulatory
intervention).
Second, our paper contributes to recent literature
that explores the impact of directors’ experience on
firm strategy (e.g., Carpenter and Westphal, 2001;
Kroll et al., 2008; McDonald et al., 2008; Tian
et al., 2011; Westphal and Fredrickson, 2001).
We add to this literature by demonstrating that
directors’ experience has an impact on a strategic
outcome—new-market entry—that has not yet
been examined. Hence, our paper helps increase
our understanding of the reach and scope of
directors’ influence on firm strategy.
Third, our study contributes to the new-market
entry literature by identifying an alternative source
of information that influences organizational decisions to enter a new market. Even after controlling
for other information channels (e.g., alliances and
corporate venture capital investments), the impact
of directors remained significant, which suggests
that these different channels may represent complementary sources of knowledge and expertise
that help mitigate the inherent uncertainty surrounding new-market entry.
Finally, we believe that our findings also have
important managerial implications. First, received
wisdom in this industry suggests that directors
are appointed, among other reasons, for the
market-specific expertise they bring from their
involvement in the boards of “competing” firms.
An important conclusion of our study is that
Strat. Mgmt. J., 36: 339–359 (2015)
DOI: 10.1002/smj
Interlocking Directors and New-Market Entry
the best candidate for a directorship position
is not necessarily the director with the greatest
experience but rather one who not only brings
relevant experience but also does not trigger the
anti-trust concerns identified in our theory. In
addition, our study clearly highlights that firms
with a problematic reputation or lower status may
be significantly handicapped in the market for
directors. While this is not a particularly surprising
finding, it does provide a note of warning to firms
trying to enhance their boards with experienced
directors that they may have to implement serious
reputation-building strategies before they seek out
experienced directors.
Limitations and directions for future research
We acknowledge several limitations of our study
and identify some directions for future research.
First, when exploring directors’ motivations to join
(or not) specific boards, we focused on directors’
reputational costs and their concerns about potential conflicts of interest between interlocked firms.
Yet, as suggested by recent research (e.g., Withers
et al., 2012), other factors, such as time available,
may also play an important role in shaping directors’ motivations. In fact, recent research shows
that directors holding multiple directorships are
more likely to leave some of their board appointments (Boivie et al., 2012). Yet, these directors
may also very well be the ones firms are most
interested in because they may possess a more
desirable (broader) experience profile. Thus, given
these opposing motivations, the impact of multiple directorships on the likelihood of board
appointment is not clear. We hope that future
research will provide a more comprehensive picture of how directors’ time availability, as well as
other constraints, shapes the likelihood of board
appointment.
Second, because the goal of our study was to
analyze interlocking directors, we focused only
on directors who were already serving on other
corporate boards. This means that our study did
not capture the full universe of possible candidates
for board appointments (for example, executives
at other firms who did not hold a directorship).
Also, it might be the case that directors of
corporate boards have additional expertise in
unique therapeutic domains obtained from their
own scientific backgrounds. Future research that
examines alternative directorship candidates and
Copyright © 2013 John Wiley & Sons, Ltd.
357
alternative sources of expertise will contribute to
a more complete understanding of the impact of
boards on new-market entry strategies.
Finally, the pharmaceutical industry, a
knowledge-intensive industry, represents an
ideal setting in which to explore the impact of
interlocked directors’ experience on new-market
entry. Yet, the conclusions obtained in this study
might not apply to less knowledge-intensive
industries where directors’ market-specific expertise might not be as valuable for new-market entry
decisions. Further research is needed to identify
the industry-specific characteristics that influence
the effects of director’s experience on new-market
entry decisions.
In conclusion, our study identifies the influence
that directors’ market-specific experience has on
new-director appointment and new-market entry
decisions, as well as the constraints firms face
when trying to leverage this source of knowledge.
We hope that future research will continue to
explore the benefits as well as the constraints that
firms face in acquiring and leveraging directors’
experience as a valuable strategic resource.
ACKNOWLEDGMENTS
We are grateful to Juan Santaló, Manuel Becerra,
Carl Kock, and Remzi Gozubuyuk for their helpful
comments and suggestions. We would also like
to thank the participants of the Academy of
Management Annual Meeting in San Antonio for
their useful feedback. Finally, we thank Associate
Editor Will Mitchell and two anonymous reviewers
for their comments and support throughout the
review process.
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