Supply Constraints and Directors’ Reputational Incentives

54 Pages Posted: 26 Jun 2017 Last revised: 11 Jun 2020

See all articles by Chris Armstrong

Chris Armstrong

University of Pennsylvania - Accounting Department

John D. Kepler

Stanford Graduate School of Business

Shawn X. Shi

Stanford Graduate School of Business

David Tsui

University of Southern California - Marshall School of Business

Date Written: June 10, 2020

Abstract

We examine how constraints on directors’ availability to serve on boards influence their labor market outcomes. We find that directors who lose (or leave) a board are more likely to subsequently gain a new board seat, regardless of their performance on the departed board, suggesting that directors often face binding supply constraints. Using three arguably exogenous changes in directors’ supply constraints, we find that this pattern of board substitution is most pronounced among directors who face greater supply constraints. Consistent with these supply constraints muting directors’ reputational incentives, we find that directors who join a new board are more likely to substitute boards—i.e., simultaneously leave one of their current boards rather than add to their total board seats—when they face greater supply constraints. Collectively, our evidence suggests that for many directors, supply constraints limit their ability to join new boards and thus diminish their reputational incentives.

Keywords: Board of directors; director incentives; career concerns; director labor market; principal-agent; corporate governance

JEL Classification: G34; J22

Suggested Citation

Armstrong, Chris S. and Kepler, John and Shi, Shawn and Tsui, David, Supply Constraints and Directors’ Reputational Incentives (June 10, 2020). Available at SSRN: https://ssrn.com/abstract=2991624 or http://dx.doi.org/10.2139/ssrn.2991624

Chris S. Armstrong (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

John Kepler

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Shawn Shi

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

David Tsui

University of Southern California - Marshall School of Business ( email )

3660 Trousdale Parkway
Los Angeles, CA 90089
United States

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