Do Outside Directorships Influence CEO Decision Making? Evidence from Labor Strikes

Abstract

CEO outside directorships are an important phenomenon; however, little is known about their influence on managerial decision making. We investigate how CEOs react after they observe, as a director of another firm, a labor strike that is plausibly exogenous to their firm. They increase cash holdings shortly afterwards, most likely due to an overreaction to the more salient strike risk. In the long run, CEOs adjust their labor negotiations. Consistent with observational learning, they offer higher wages during contract negotiations and manage to reduce strike risk. These results suggest that outside directorships can facilitate both behavioral biases and observational learning.

Keywords: Outside directorships, labor strikes, salience theory, observational learning, cash holdings

JEL Classification: D80, G31, G34, J52