The Supply of Corporate Directors and Board Independence
Review of Financial Studies 26(6), 1561-1605
61 Pages Posted: 4 Aug 2011 Last revised: 8 May 2013
Date Written: March 26, 2013
Empirical evidence on the relations between board independence and board decisions and firm performance is generally confounded by serious endogeneity issues. We circumvent these endogeneity problems by demonstrating the strong impact of the local director labor market on board composition. Specifically, we show that proximity to larger pools of local director talent leads to more independent boards for all but the largest quartile of S&P1500. Using local director pools as an instrument for board independence, we document that board independence has a positive effect on firm value and operating performance and CEO fraction of incentive based pay and turnover.
Keywords: board of directors, board expertise, director labor market, location, firm value, firm performance, CEO compensation
JEL Classification: G30, G34
Suggested Citation: Suggested Citation