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The Labor Market for Directors and Externalities in Corporate Governance

Doron Levit

University of Pennsylvania - Finance Department

Nadya Malenko

Boston College - Carroll School of Management

November 1, 2013

This paper studies how directors' reputational concerns in the labor market affect board structure, corporate governance, and firm value. In our setting, directors affect their firms' governance, and governance, in turn, affects firms' demand for new directors. Whether the labor market rewards a shareholder-friendly or management-friendly reputation is thus endogenous and depends on the aggregate quality of corporate governance. We show that directors' desire to be invited to other boards creates strategic complementarity of governance across firms. As a result, an equilibrium with strong aggregate governance can co-exist with a weak governance equilibrium, suggesting that countries or industries with similar characteristics can have very different governance systems. We also show that directors' reputational concerns amplify the governance system: strong systems become stronger and weak systems become weaker. We derive implications for regulations restricting multiple directorships, transparency, shareholder activism, and board size.

Number of Pages in PDF File: 52

Keywords: board of directors, corporate governance, reputation, externalities, strategic complementarity, transparency

JEL Classification: D62, D71, D82, D83, G34, G38, J20

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Date posted: July 8, 2012 ; Last revised: November 18, 2013

Suggested Citation

Levit, Doron and Malenko, Nadya, The Labor Market for Directors and Externalities in Corporate Governance (November 1, 2013). Available at SSRN: http://ssrn.com/abstract=2101874 or http://dx.doi.org/10.2139/ssrn.2101874

Contact Information

Doron Levit
University of Pennsylvania - Finance Department ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Nadya Malenko (Contact Author)
Boston College - Carroll School of Management ( email )
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
HOME PAGE: http://www2.bc.edu/nadya-malenko/
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References:  36
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