Do Director Elections Matter?
University of Illinois at Urbana-Champaign
University of British Columbia (UBC) - Sauder School of Business; China Academy of Financial Research (CAFR)
University of Chicago - Booth School of Business
May 23, 2015
Abstract:
Using a hand-collected sample of more than 30,000 directors nominated for election over the period 2001-2010, we construct a novel measure of director proximity to elections — Closeness-to-election. We find that the closer a director is to her next election, the higher is CEO turnover-performance sensitivity. Each year closer to director elections is associated with a 23% increase in CEO turnover-performance sensitivity. Three tests support a causal interpretation of the results. First, when we require directors to have a minimum tenure of three years, there is no material change in the results, suggesting that the timing of when directors join their boards is unlikely to drive the results. Second, we find similar results when we use director Closeness-to-election on other boards as a measure of proximity to elections. Third, when we restrict the analysis to firms with unitary boards, there is no material change in the results, suggesting that director self-selection into firms with staggered boards does not drive the results. Cross-sectional tests suggest that, when other governance mechanisms are in place, CEO turnover-performance sensitivity is affected to a lesser extent by Closeness-to-election. We conclude that director elections have important implications for corporate governance.
Number of Pages in PDF File: 51
Keywords: agency problems, CEO turnover-performance sensitivity, corporate governance, director elections, staggered boards
JEL Classification: G34, G38
