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Board seat accumulation by executives: a shareholder's perspective

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The National Association of Corporate Directors and the Council of Institutional Investors have issued guidelines suggesting restrictions on the number of outside directorships for corporate executives with full-time jobs. The authors provide evidence supporting such guidelines by examining stock returns for 216 publicly traded sender (executive's main employer) and receiver (where the executive is an outside director) firms at the announcement of new outside director nominations. While average sender firm announcement returns (CAR) are negative, there is no significant relation between the number of directorships the executive already holds and CARs. However, in additional tests, they find that the number of directorships proxies for "busyness" as well as a signal of quality of the executive. They show that for sender firms where the executive's time is more valuable, e.g., firms with greater growth opportunities, the announcement returns are negatively related to the number of directorships already held by the executive. They argue that this evidence is consistent with a "busy" hypothesis. On the other hand, they find a marginally significant positive relation between the number of directorships and CAR for low growth sender firms and executives with shorter track records, consistent with a signaling hypothesis. The negative association between the number of directorships and shareholder value remains even after controlling for the expected number of directorships and for diversified shareholders who hold a value-weighted portfolio of the sender and receiver firms. The authors interpret their findings as consistent with executives choosing to serve on outside boards as a form of perquisite consumption at the expense of shareholders.

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