The Labor Market for Directors and Externalities in Corporate Governance: Evidence from the International Labor Market

We find that the directorial labor market’s ability to align the incentives of managers and shareholders is not worldwide, but instead depends on the aggregate level of investor protection in a country. Our evidence suggests that if a country’s corporate governance environment is strong and boards are likely to protect the interest of shareholders, a reputation for being shareholder friendly helps in obtaining more directorships and these appointments increase firm value. However, when country level aggregate governance is weak and boards are likely captured by managers, having a shareholder friendly reputation causes directors to lose seats and these appointments do not increase firm value. Our findings suggest that the labor market offers limited incentives for directors to monitor managers in weak investor protection countries and thus the labor market as a mechanism to improve corporate governance is least effective in the countries where it is needed the most.