Are Directors Rewarded for Excellence? Evidence from Reputation Shocks and Career Outcomes

Abstract

This study examines whether the labor market rewards directors for individual excellence. We use national director awards to capture large, positive shocks to individual reputation. We find strong evidence that the labor market recognizes and rewards “superstar” directors. Award events lead to positive announcement returns and increase awardees’ chances of gaining new board seats at prestigious firms. Consistent with theories of career concerns and labor market signaling, the reputational effects are greater for younger directors and for nonoverboarded directors. Overall, our findings offer new insights into the nature of reputation and rewards in the upper echelon of the director labor market.

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“…As Chen et al (2021) state, winning awards make directors popular. They become more selective in the job market and more likely to procure board seats in large firms.…”

“…In order to address potential endogeneity issues, I adopt the propensity score matching procedure (PSM) outlined in previous studies (Chen et al, 2021;Malmendier & Tate, 2009;Rosenbaum & Rubin, 1983). Each award-winner director is matched with the nearest neighbor of a non-awardee director with the closest probability of winning.…”

“…The limitation of the propensity‐score matching procedure (PSM) still exists if the unobservable determinants of winning awards are not completely included in the tests. However, PSM is well suited for this study since the award granting decisions are made based on the observable characteristics and public information by outside award committees (Chen et al, 2021; Malmendier & Tate, 2009). In addition, a placebo test is used as a robustness check, by randomly assigning director award‐winning years and conducting the same tests to verify if the effects of superstar directors still exist.…”

“…Prior literature uses the number of board seats held by directors as the measurement of director reputation or busyness. Moreover, to my knowledge, only two studies (Chen et al, 2021; Cheng & Baran, 2020) have adopted this unique sample of awardee directors. This research investigates uncharted areas of award‐winning directors.…”

“…The limitation of the propensity-score matching procedure (PSM) still exists if the unobservable determinants of winning awards are not completely included in the tests. However, PSM is well suited for this study since the award granting decisions are made based on the observable characteristics and public information by outside award committees (Chen et al, 2021;Malmendier & Tate, 2009).…”