Supply Constraints and Directors’ Reputational Incentives

Abstract

We examine how constraints on directors’ availability to serve on boards influence their labor market outcomes. We find that directors who lose (or leave) a board are more likely to subsequently gain a new board seat, regardless of their performance on the departed board, suggesting that directors often face binding supply constraints. Using three arguably exogenous changes in directors’ supply constraints, we find that this pattern of board substitution is most pronounced among directors who face greater supply constraints. Consistent with these supply constraints muting directors’ reputational incentives, we find that directors who join a new board are more likely to substitute boards—i.e., simultaneously leave one of their current boards rather than add to their total board seats—when they face greater supply constraints. Collectively, our evidence suggests that for many directors, supply constraints limit their ability to join new boards and thus diminish their reputational incentives.