“Financial experts to the rescue”: Evidence from corporate reputation risk and firm valuation

Abstract

This study examines whether independent directors' financial expertise ( IDFE ) mitigates the adverse effect of corporate reputation risk ( CRRisk ) on firm value in African capital markets. Drawing on agency theory, resource dependence theory, and reputation theory, we develop a depth-based conceptualisation of financial expertise encompassing education, professional certification, and experience. Using a longitudinal sample of 203 non-financial firms listed across twelve African stock exchanges from 2014 to 2023, we employ two-way fixed effects regression to test the CRRisk –firm value relationship and the moderating role of IDFE . We find that CRRisk significantly reduces firm value. Importantly, IDFE attenuates this negative effect, with deeper financial expertise exhibiting a stronger mitigating influence. Further analyses reveal that the moderating role of IDFE is more pronounced in firms characterised by low transparency, high agency problems, elevated managerial risk-taking, and greater environmental uncertainty. Our findings contribute to the literature by moving beyond critical mass approaches and demonstrating that the depth of financial expertise is a critical governance resource for protecting firm value against reputation risk in weak institutional environments. • Corporate reputation risk reduces firm value in African listed firms. • Financially expert independent directors attenuate reputation risk effects. • Independent director expertise matters more than total board expertise. • Effects are stronger in low-transparency and high-agency-cost firms. • Evidence spans 203 firms in 12 African stock markets, 2014-2023.