Independent Director Incentives: Where Do Talented Directors Spend Their Limited Time and Energy?
Ronald W. Masulis
University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN)
University of Alabama - Culverhouse College of Commerce and Business Administration
November 14, 2013
Journal of Financial Economics (JFE), Forthcoming
AFA 2013 San Diego Meetings Paper
ECGI - Finance Working Paper No. 355/2013
We study reputation incentives in the director labor market and find that directors with multiple directorships distribute their effort unequally based on the directorship’s relative prestige. When directors experience an exogenous increase in a directorship’s relative ranking, their board attendance rate increases and subsequent firm performance improves. Also, directors are less willing to relinquish their relatively more prestigious directorships, even when firm performance declines. Finally, forced CEO departure sensitivity to poor performance rises when a larger fraction of independent directors view the board as relatively more prestigious. We conclude that director reputation is a powerful incentive for independent directors.
Number of Pages in PDF File: 55
Keywords: director incentives, busy directors, labor markets, firm reputation, firm performance
JEL Classification: G30, G32, G34, D23
Date posted: March 7, 2012 ; Last revised: November 25, 2013
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