The Labor Market for Directors and Externalities in Corporate Governance: Evidence from the International Labor Market
69 Pages Posted: 1 Jan 2015 Last revised: 18 Jul 2018
Date Written: June 30, 2018
We find that the directorial labor market’s ability to align the incentives of managers and shareholders depends on the aggregate level of investor protection in a country. If a country’s corporate governance environment is strong and boards are likely to protect the interest of shareholders, a reputation for being shareholder friendly helps in obtaining more directorships and these appointments increase firm value. A reputation for being shareholder unfriendly results in fewer directorships and these appointments decrease firm value. However, such effects are either absent or significantly diminished when country level aggregate governance is weak and boards are likely captured by managers. Further, directors are more likely to lose their seats on the boards of firms subject to shareholder unfriendly events only when the aggregate governance quality is strong. Our findings suggest that the labor market as a mechanism to improve corporate governance is least effective in the countries where it is needed the most.
Keywords: Labor market for directors, investor protection, global reputation, ex-post settling hypothesis, director reputation
JEL Classification: F30, G15, G34, K22, M16
Suggested Citation: Suggested Citation