Boards of a Feather: Homophily in Foreign Director Appointments Around the World
49 Pages Posted: 21 Oct 2015 Last revised: 31 Mar 2019
Date Written: March 29, 2019
We examine how shared institutional, sociological and cultural characteristics between countries affect director appointments. We document that shared country-level characteristics explain a large variation in the likelihood of appointing foreign directors to firm boards. In our empirical analyses, we use a gravity model and find that director appointments between country-pairs increase in the countries’ economic significance, geographic and cultural proximity. We show that homophily plays a crucial role in director appointments across countries and is suggestive of a potential friction in the global convergence of governance practices. Moreover, we assess how homophily shapes the relation between foreign director appointments and firm value by exploiting an exogenous shock to the demand for corporate directors resulting from the staggered adoption of gender quota rules. We find that after the adoption of gender quota rules homophily in new director appointments harms firm value. Our findings suggest that homophily in the director market is a potential barrier in the appointment of directors.
Keywords: foreign directors, gravity model, corporate governance
JEL Classification: F20, F22, G15, G34
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