Boards in Practice: Director Location, Qualifications, and Credible Contracting

48 Pages Posted: 3 May 2012

See all articles by Conrad S. Ciccotello

Conrad S. Ciccotello

Daniels College of Business, University of Denver

Zinat S. Alam

University of North Texas, College of Business Administration, Department of Finance, Insurance Real Estate and Law

Mark A. Chen

Georgia State University - Robinson College of Business

Harley E. Ryan

Georgia State University - Department of Finance

Date Written: April 10, 2012

Abstract

Using data on the qualifications and residential locations of directors, we study boards “in practice.” We find that directors’ qualifications and distance from headquarters are related to factors such as the proximity of headquarters to a large city, firm size, CEO power, and the board’s need for tacit information. Directors’ proximity to headquarters reflects a trade-off between better acquisition of tacit information and greater management influence. The stock market responds positively to the appointment of proximate directors, but only when CEO tenure is short. The market reaction to forced CEO turnover is negative for boards with proximate directors and long-tenured CEOs. Neither the appointment of a remote director nor the dismissal of a CEO by a remote board leads to abnormal market reactions on average. These appointment and turnover results suggest that distant directors act as “market proxies,” while proximate directors add a credible “two-sided” element to governance. We also observe that when a CEO is highly “legitimate,” such as in a family firm, she faces less stringent incentives from incentive pay and a reduced threat of dismissal. In sum, our empirical findings support Williamson’s (2008) arguments that stress the importance of understanding credible contracting between boards and management and that raise concerns about public policy aimed at achieving “boards in principle.”

Suggested Citation

Ciccotello, Conrad S. and Alam, Zinat S. and Chen, Mark A. and Ryan, Harley E., Boards in Practice: Director Location, Qualifications, and Credible Contracting (April 10, 2012). 7th Annual Conference on Empirical Legal Studies Paper, Available at SSRN: https://ssrn.com/abstract=2048814 or http://dx.doi.org/10.2139/ssrn.2048814

Conrad S. Ciccotello (Contact Author)

Daniels College of Business, University of Denver ( email )

2201 S. Gaylord St
Denver, CO 80208-2685
United States

Zinat S. Alam

University of North Texas, College of Business Administration, Department of Finance, Insurance Real Estate and Law ( email )

1155 Union Circle #305340
Denton, TX 76203
United States

Mark A. Chen

Georgia State University - Robinson College of Business ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

Harley E. Ryan

Georgia State University - Department of Finance ( email )

University Plaza
35 Broad Street, Suite 1221
Atlanta, GA 30303-3083
United States
404-651-2674 (Phone)
404-651-2630 (Fax)

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