45 Pages Posted: 22 May 2007
Date Written: August 14, 2007
This paper develops a matching model in the director market with outside options to explain the equilibrium board quality. Based on Hermalin (2005) and Gabaix and Landier (2006), the board of directors has the function of monitoring and advising to affect the earning of firm assuming that the impact of a CEO's quality increases with the size of the firm under his control. This model shows that the big firms make board positions more attractive compared to outside options. Also, only when the impact of the advising by the board is strong, the more talented CEO can induce the high qualified outside directors. It follows that the board quality increases. Additionally, the model can explain the observed fact that the quality of directors on the same boards is dispersed. The estimations suggest that the talented ongoing CEOs and retired CEOs go to the firms which have the high market capitalization values and the large amount of sales. The evidence for the effect of the incumbent CEO's talent is mixed. I also find that the firms which have a large amount of sales pay more to outside directors. The compensation for directors, however, does not affect the quality of boards.
Keywords: Corporate governance, Board of director, Job search, Matching
JEL Classification: D23, G34, G38, J41, J44, J64, L25
Suggested Citation: Suggested Citation
Lee, Changmin, Where Do the Talented People Work as Outside Directors? (August 14, 2007). CAEPR Working Paper No. 2007-006. Available at SSRN: https://ssrn.com/abstract=988119 or http://dx.doi.org/10.2139/ssrn.988119
By Kevin Murphy