This paper examines the effects of foreign director on firm performance, a subset of board composition which has not received enough attention like female or outside directors, by providing direct empirical evidence. No single theory directly links the board composition with financial performance but resource dependence theory provides the most convincing theoretical arguments for board diversity, that different types of directors will bring different beneficial resources to the firm and a more diverse board will provide more resources and that make firm perform better. Why firms introduce foreign directors to their all-domestic board? And do foreign directors provide valuable resources to shareholders? We dealt with these research questions in our paper.

   Our sample consists all listed non-financial firms in Japan from 2004 to 2015. Foreign directors in our research are defined as directors whose nationalities are not Japanese by identifying their Katakana names, oversea birthplaces or oversea undergraduate and higher education. There is an advantage of using Japanese data as there are many big firms in Japan well-known as global corporations but all board members are still Japanese. To utilize that unique characteristic, we focus on the firms introduce their first foreign director(s) during the research period. By measuring the effects of these first-introduced foreign directors, we can obtain the full effects that samples of other countries do not assess to, especially considering the large cultural gap between Japan and US or European countries.

   The effects of foreign director on firm performance are measured through the operating performance changes after having introduced first foreign director(s), proxied by ROA and the market reactions to announcements of the introduction of first foreign directors by calculating the cumulative abnormal return (CAR) over five window periods. In our paper, we used theoretically well-grounded econometric methods such as event study, logistic regression and propensity score matching to measure the effects.

   In brief, we document that firms having foreign director on board are of larger size, larger foreign sales, higher foreign ownership and higher R&D investment than firms without. Announcements of first-time introduction are associated with positive abnormal returns but not statistically significant. We also find weak empirical evidence that the long-term performance of the introduced firms is worse than control firms having no foreign directors on board.

   Other findings include, first, first introduction of foreign directors is associated with big events of ownership change, corporate restructure, subsidiary turnaround and foreign business expansion, especially during financial crisis period. Second, American directors are dominant among introduced foreign directors but recently Chinese, Taiwanese and South Korean directors increased significantly. Third, there is no big difference in the number of outside and inside foreign director introduction which shows that the introduction of foreign outside director is indifferent with the pressure of outside director introduction trend in Japan recently.