Supply Constraints and Directors’ Reputational Incentives
47 Pages Posted: 26 Jun 2017 Last revised: 2 Jul 2021
Date Written: July 1, 2021
We study the labor market consequences that result from directors’ limited capacity to sit on boards and their resulting incentives stemming from career concerns and future prospects. We find that directors who leave one board are more likely to subsequently join a new board, regardless of the previous firm’s performance. This findings is symptomatic of excess demand for directors’ services and therefore binding constraints on their ability to sit on additional boards. Consistent with many directors facing binding supply constraints, using three arguably exogenous changes in the tightness of directors’ supply constraints, we find that directors with more binding constraints are more likely to substitute board seats as these constraints relax. Collectively, our evidence suggests that many directors face limitations in their ability to join additional boards, potentially diminishing their labor market-based incentives.
Keywords: Board of directors; director incentives; career concerns; director labor market; principal-agent; corporate governance
JEL Classification: G34; J22
Suggested Citation: Suggested Citation