Supply Constraints and Directors’ Reputational Incentives

48 Pages Posted: 26 Jun 2017 Last revised: 4 May 2021

See all articles by Chris Armstrong

Chris Armstrong

University of Pennsylvania - Accounting Department

John D. Kepler

Stanford Graduate School of Business

Shawn Shi

Stanford Graduate School of Business

David Tsui

University of Southern California - Marshall School of Business

Date Written: May 3, 2021

Abstract

We study the labor market consequences that result from directors’ inherently limited capacity to sit boards and how these, in turn, influence what is arguably their most importance source of incentives—namely those stemming from career concerns and future prospects. We find that directors who leave one board are also more likely to subsequently join a new board, regardless of the previous firm’s—as well as their own—performance. Together, these findings are symptomatic of excess labor market demand for their services and therefore binding constraints on their ability to sit on additional boards. Consistent with this conjecture, 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 one board seat for another as these constraints relax, indicating that many directors do in fact face binding supply constraints. Collectively, our evidence suggests that many directors face limitations in their ability to join additional boards, potentially diminishing any incentives that stem from the labor market.

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 (May 3, 2021). 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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