Reputation Incentives of Independent Directors: Impacts on Board Monitoring and Adverse Corporate Actions

Abstract

Extensive research finds that shareholder and CEO preferences affect demand for director services. We find a large body of evidence showing that independent director reputation incentives influence the supply of director services. These reputation incentives vary across firms and over time, significantly influencing important board decisions and firm outcomes. When more independent directors rank a directorship highly, firms experience fewer actions that hurt shareholder wealth and director reputation and more actions that enhance shareholder wealth and director reputation. These results are invariant to alternative adjustments for potential endogeneity. We conclude that director reputation affects key board decisions and shareholder value by influencing director allocation of efforts across their multiple directorships.