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Independent director incentives: Where do talented directors spend their limited time and energy?

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  • Masulis, Ronald W.
  • Mobbs, Shawn

Abstract

We study reputation incentives in the director labor market and find that directors with multiple directorships distribute their effort unequally based on the directorship's relative prestige. When directors experience an exogenous increase in a directorship's relative ranking, their board attendance rate increases and subsequent firm performance improves. Also, directors are less willing to relinquish their relatively more prestigious directorships, even when firm performance declines. Finally, forced Chief Executive Officer departure sensitivity to poor performance rises when a larger fraction of independent directors view the board as relatively more prestigious. We conclude that director reputation is a powerful incentive for independent directors.

Suggested Citation

  • Masulis, Ronald W. & Mobbs, Shawn, 2014. "Independent director incentives: Where do talented directors spend their limited time and energy?," Journal of Financial Economics, Elsevier, vol. 111(2), pages 406-429.
  • Handle: RePEc:eee:jfinec:v:111:y:2014:i:2:p:406-429
    DOI: 10.1016/j.jfineco.2013.10.011
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    More about this item

    Keywords

    Director incentives; Busy directors; Labor markets; Firm reputation; Firm performance;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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