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Local Director Talent and Board Governance (with Diana Knyazeva)

Local Director Talent and Board Governance (with Diana Knyazeva). Overview. Motivation and related work Hypotheses Data Summary of findings. Motivation. Effects of the firm’s environment on board composition Labor markets for prospective outside directors

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Local Director Talent and Board Governance (with Diana Knyazeva)

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  1. Local Director Talent and Board Governance (with Diana Knyazeva)

  2. Overview • Motivation and related work • Hypotheses • Data • Summary of findings

  3. Motivation • Effects of the firm’s environment on board composition • Labor markets for prospective outside directors • Local component to director labor markets • Costlier to attract out-of-area directors whereas local directors face lower transportation/opportunity costs of time and also benefit more from building their reputation with local executives by sitting on various local firms’ boards • Soft information costly to convey over long distances (local directors have area-specific knowledge)

  4. Motivation • Outside board members likely to come from executive, financial, or academic backgrounds • Particularly, executives of other firms in the same industry • Higher density and lower distance to potential sources of prospective outside directors (local pool of prospective directors, including same-industry firms, large financial institutions, and universities) should increase the likelihood of attracting outside directors

  5. Related work • Determinants of board composition • Linck, Netter, and Yang 2008; Boone et al. 2008; Hermalin and Weisbach 1998 • Boards and firm value • Rosenstein and Wyatt 1990; Yermack 1996, 2004; Fich 2005; Guner, Malmendier and Tate 2006 • Geographical factors • Loughran and Schulz 2005; Kedia, Panchapagesan and Uysal 2004; Almazan, Titman and Uysal 2008; John, Knyazeva and Knyazeva 2008; Malloy, 2005; Bae, Stulz, and Tan, 2008; John and Kadyrzhanova 2008 (peer effects); Kono et al. 1997 • Density of wealthy individuals and blockholders • Cronqvist and Fahlenbrach 2008

  6. Hypotheses • Local pool of prospective directors should be associated with a higher proportion of outside directors • Dependence of firm board composition on local director pool is expected to vary with firm prominence and costs of soft information • Local pool of prospective directors should increase the presence of executive experts on the board • Percent of financial/academic experts on boards is decreasing in distance to large financial institutions/universities • Instrument for board composition in governance/value analyses

  7. Data (1) • US Compustat/CRSP 1996-2006 • Risk Metrics data on boards and takeover defenses • CDA Spectrum 13f data on institutional blockholdings • US-incorporated firms only, assets at least $20m, excluding financials and utilities, firms with HQ overseas or in AK/HI (right tail on geographical measures)

  8. Data (2) • Local director pool • Log number of firms in the same industry within 60mi/100mi radius of the firm’s headquarters (HQ) • Proportion of firms in the same industry that are HQ’d within 60mi of the firm’s • Log distance to closest large financial institution/university

  9. Board independence and local director talent

  10. Board independence and local director talent: Subsamples

  11. Boards and local director talent: Other variables

  12. M/B and local director talent: IV M/B is higher, as is incentive pay

  13. Summary of findings • Local director pool has a positive effect on the proportion of outside directors • Small firms, firms with low product market share, young firms, and firms without a blockholder (less prominence, harder to draw notice from prospective directors) are more dependent on the local director pool • Risky firms and firms in competitive industries are more dependent on the local pool (potentially harder to attract directors from far away due to career concerns associated with the firm’s environment) • After governance reforms, firms less reliant on local director pool and more likely to do a nationwide search for outside directors

  14. Summary of findings • Proportion of executive experts on the board is increasing in the size of the local director talent pool • Percent of financial/academic experts on boards is decreasing in distance to large financial institutions/universities • Have instrumented for board composition using the proposed instrument and confirmed the effect of governance in governance/value analyses

  15. Discussion and future work • For firms close to larger director pools, is the pressure to increase director independence due to competition? • Not solely due to competition (will include a direct control for HI); subsample tests • Is the peer governance effect accounting for it • No, controlled for peer effect at the state level • Big City effect (cluster of prospective directors)? • No, controlled for it separately • More soft information tests

  16. Robustness checks: other X variables

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