Where do the Talented People Work as Outside Directors?
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.
|Date of creation:||May 2007|
|Date of revision:|
|Contact details of provider:|| Postal: 812-855-1021|
Web page: http://www.iub.edu/~caepr
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kevin J. Murphy & Ján Zábojník, 2004. "CEO Pay and Appointments: A Market-Based Explanation for Recent Trends," American Economic Review, American Economic Association, vol. 94(2), pages 192-196, May.
- Xavier Gabaix & Augustin Landier, 2006.
"Why Has CEO Pay Increased So Much?,"
2006 Meeting Papers
518, Society for Economic Dynamics.
- Stephen P. Ferris & Murali Jagannathan & A. C. Pritchard, 2003. "Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments," Journal of Finance, American Finance Association, vol. 58(3), pages 1087-1112, 06.
- Luis Garicano & Esteban Rossi-Hansberg, 2005.
"Organization and Inequality in a Knowledge Economy,"
NBER Working Papers
11458, National Bureau of Economic Research, Inc.
- Luis Garicano & Esteban Rossi-Hansberg, 2006. "Organization and Inequality in a Knowledge Economy," The Quarterly Journal of Economics, Oxford University Press, vol. 121(4), pages 1383-1435.
- Benjamin E. Hermalin, 2005. "Trends in Corporate Governance," Journal of Finance, American Finance Association, vol. 60(5), pages 2351-2384, October.
- Benjamin E. Hermalin & Michael S. Weisbach, 1996.
"Endogenously Chosen Boards of Directors and Their Monitoring of the CEO,"
_004, University of California at Berkeley, Haas School of Business.
- Hermalin, Benjamin E & Weisbach, Michael S, 1998. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," American Economic Review, American Economic Association, vol. 88(1), pages 96-118, March.
- Benjamin E. Hermalin & Michael S. Weisbach, 1996. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," Microeconomics 9602001, EconWPA, revised 09 Oct 1996.
- Brickley, James A. & Linck, James S. & Coles, Jeffrey L., 1999. "What happens to CEOs after they retire? New evidence on career concerns, horizon problems, and CEO incentives," Journal of Financial Economics, Elsevier, vol. 52(3), pages 341-377, June.
- Changmin Lee, 2007. "What’s Happened Over the Past 10 years to the Selection of Retired CEOs as Board Members?," Caepr Working Papers 2007-007, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
- Kaplan, Steven N. & Reishus, David, 1990. "Outside directorships and corporate performance," Journal of Financial Economics, Elsevier, vol. 27(2), pages 389-410, October.
When requesting a correction, please mention this item's handle: RePEc:inu:caeprp:2007006. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Center for Applied Economics and Policy Research)
If references are entirely missing, you can add them using this form.