The Labor Market for Directors and Externalities in Corporate Governance

40 Pages Posted: 8 Jul 2012 Last revised: 22 Mar 2016

See all articles by Doron Levit

Doron Levit

University of Pennsylvania - Finance Department; European Corporate Governance Institute (ECGI)

Nadya Malenko

Boston College - Department of Finance; Centre for Economic Policy Research (CEPR)

Date Written: April 2016


This paper studies how directors' reputational concerns 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 determined in equilibrium and depends on aggregate governance. We show that directors' desire to be invited to other boards creates strategic complementarity of corporate governance across firms. Directors' reputational concerns amplify the governance system: strong systems become stronger and weak systems become weaker. We derive implications for multiple directorships, board size, transparency, and board independence.

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

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

Suggested Citation

Levit, Doron and Malenko, Nadya, The Labor Market for Directors and Externalities in Corporate Governance (April 2016). Journal of Finance, Vol. 71, No. 2, April 2016 . Available at SSRN: or

Doron Levit

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

European Corporate Governance Institute (ECGI) ( email )

B-1050 Brussels

Nadya Malenko (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

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