Supply Constraints and Directors’ Reputational Incentives
48 Pages Posted: 26 Jun 2017 Last revised: 4 May 2021
Date Written: May 3, 2021
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: Suggested Citation