Hostname: page-component-76fb5796d-5g6vh Total loading time: 0 Render date: 2024-04-25T18:47:51.971Z Has data issue: false hasContentIssue false
  • English
  • Français

Does the Location of Directors Matter? Information Acquisition and Board Decisions

Published online by Cambridge University Press:  04 March 2014

Zinat S. Alam ,
Mark A. Chen ,
Conrad S. Ciccotello  and
Harley E. Ryan Jr.
Zinat S. Alam
Affiliation:
zalam@fau.edu, College of Business, Florida Atlantic University, 777 Glades Rd, Boca Raton, FL 33431
Mark A. Chen
Affiliation:
machen@gsu.edu, Robinson College of Business, Georgia State University, 35 Broad St, Atlanta, GA 30303.
Conrad S. Ciccotello
Affiliation:
cciccotello@gsu.edu, Robinson College of Business, Georgia State University, 35 Broad St, Atlanta, GA 30303.
Harley E. Ryan Jr.
Affiliation:
cryan@gsu.edu, Robinson College of Business, Georgia State University, 35 Broad St, Atlanta, GA 30303.
Get access Rights & Permissions [Opens in a new window]

Abstract

Using data on over 4,000 individual residential addresses, we find that geographic distance between directors and corporate headquarters is related to information acquisition and board decisions. The fraction of a board’s unaffiliated directors who live near headquarters is higher when information-gathering needs are greater. When the fraction of unaffiliated directors living near headquarters is lower, nonroutine chief executive officer (CEO) turnover is more sensitive to stock performance. Also, the level, intensity, and sensitivity of CEO equity-based pay increase with board distance. Overall, our results suggest that geographic location is an important dimension of board structure that influences directors’ costs of gathering information.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 1 , February 2014 , pp. 131 - 164
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Adams, R. B., and Ferreira, D.. “A Theory of Friendly Boards.” Journal of Finance, 62 (2007), 217–250.CrossRefGoogle Scholar
Adams, R. B.; Hermalin, B. E.; and Weisbach, M. S.. “The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey.” Journal of Economic Literature, 48 (2010), 58–107.CrossRefGoogle Scholar
Ai, C., and Norton, E.. “Interaction Terms in Logit and Probit Models.” Economics Letters, 80 (2003), 123–129.CrossRefGoogle Scholar
Bae, K.; Stulz, R.; and Tan, H.. “Do Local Analysts Know More? A Cross-Country Study of the Performance of Local Analysts and Foreign Analysts.” Journal of Financial Economics, 88 (2008), 581–606.CrossRefGoogle Scholar
Black, F., and Scholes, M.. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, 81 (1973), 637–654.CrossRefGoogle Scholar
Blackwell, D. W.; Brickley, J. A.; and Weisbach, M. S.. “Accounting Information and Internal Performance Evaluation.” Journal of Accounting and Economics, 17 (1994), 331–358.CrossRefGoogle Scholar
Boone, A. L.; Field, L. C.; Karpoff, J. M.; and Raheja, C. G.. “The Determinants of Corporate Board Size and Composition: An Empirical Analysis.” Journal of Financial Economics, 85 (2007), 66–101.CrossRefGoogle Scholar
Booth, J. R., and Deli, D.. “Factors Affecting the Number of Outside Directorships Held by CEOs.” Journal of Financial Economics, 40 (1996), 81–104.CrossRefGoogle Scholar
Borokhovich, K. A.; Parrino, R.; and Trapani, T.. “Outside Directors and CEO Selection.” Journal of Financial and Quantitative Analysis, 31 (1996), 337–355.CrossRefGoogle Scholar
Bryan, S.; Hwang, L.; and Lilien, S.. “CEO Stock-Based Compensation: An Empirical Analysis of Incentive-Intensity, Relative Mix, and Economic Determinants.” Journal of Business, 73 (2000), 661–693.CrossRefGoogle Scholar
Butler, A. “Distance Still Matters: Evidence from Municipal Bond Underwriting.” Review of Financial Studies, 21 (2008), 763–784.CrossRefGoogle Scholar
Cohen, L.; Frazzini, A.; and Malloy, C. J.. “The Small World of Investing: Board Connections and Mutual Fund Returns.” Journal of Political Economy, 116 (2008), 951–979.CrossRefGoogle Scholar
Cohen, L.; Frazzini, A.; and Malloy, C. J.. “Sell-Side School Ties.” Journal of Finance, 65 (2010), 1409–1437.CrossRefGoogle Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Boards: Does One Size Fit All?” Journal of Financial Economics, 87 (2008), 329–356.CrossRefGoogle Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Co-Opted Boards.” Review of Financial Studies, forthcoming (2014).CrossRefGoogle Scholar
Core, J., and Guay, W.. “The Use of Equity Grants to Manage Optimal Equity Incentive Levels.” Journal of Accounting and Economics, 28 (1999), 151–184.CrossRefGoogle Scholar
Core, J., and Guay, W.. “Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility.” Journal of Accounting Research, 40 (2002), 613–630.CrossRefGoogle Scholar
Cornelli, F.; Kominek, Z.; and Ljungqvist, A.. “Monitoring Managers: Does It Matter?” Journal of Finance, 68 (2013), 431–481.CrossRefGoogle Scholar
Coughlan, A. T., and Schmidt, R. M.. “Executive Compensation, Management Turnover, and Firm Performance: An Empirical Investigation.” Journal of Accounting and Economics, 7 (1985), 43–66.CrossRefGoogle Scholar
Coval, J., and Moskowitz, T.. “Home Bias at Home: Local Equity Preference in Domestic Portfolios.” Journal of Finance, 54 (1999), 2045–2073.CrossRefGoogle Scholar
Coval, J., and Moskowitz, T.. “The Geography of Investment: Informed Trading and Asset Prices.” Journal of Political Economy, 109 (2001), 811–841.CrossRefGoogle Scholar
Denis, D., and Denis, D.. “Performance Changes Following Top Management Dismissals.” Journal of Finance, 50 (1995), 1029–1057.CrossRefGoogle Scholar
Denis, D.; Denis, D.; and Sarin, A.. “Ownership Structure and Top Executive Turnover.” Journal of Financial Economics, 45 (1997), 193–221.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Industry Costs of Equity.” Journal of Financial Economics, 43 (1997), 153–193.CrossRefGoogle Scholar
Ferris, S. P.; Jagannathan, M.; and Pritchard, A.. “Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments.” Journal of Finance, 58 (2003), 1087–1111.CrossRefGoogle Scholar
Fich, E. M., and Shivdasani, A.. “Are Busy Boards Effective Monitors?” Journal of Finance, 61 (2006), 689–724.CrossRefGoogle Scholar
Fracassi, C., and Tate, G.. “External Networking and Internal Firm Governance.” Journal of Finance, 67 (2012), 153–194.CrossRefGoogle Scholar
Gaver, J., and Gaver, K.. “Compensation Policy and the Investment Opportunity Set.” Financial Management, 24 (1995), 19–32.CrossRefGoogle Scholar
Gilson, S. “Management Turnover and Financial Distress.” Journal of Financial Economics, 25 (1989), 241–262.CrossRefGoogle Scholar
Harris, M., and Raviv, A.. “A Theory of Board Control and Size.” Review of Financial Studies, 21 (2008), 1797–1832.CrossRefGoogle Scholar
Hermalin, B., and Weisbach, M.. “Endogenously Chosen Boards of Directors and Their Monitoring of the CEO.” American Economic Review, 88 (1998), 96–118.Google Scholar
Holmstrom, B. “Moral Hazard and Observability.” Bell Journal of Economics, 10 (1979), 74–91.CrossRefGoogle Scholar
Huson, M.; Parrino, R.; and Starks, L.. “Internal Monitoring Mechanisms and CEO Turnover: A Long-Term Perspective.” Journal of Finance, 56 (2001), 2265–2297.CrossRefGoogle Scholar
Hwang, B., and Kim, S.. “It Pays to Have Friends.” Journal of Financial Economics, 93 (2009),138–158.CrossRefGoogle Scholar
Jenter, D., and Kanaan, F.. “CEO Turnover and Relative Performance Evaluation.” Journal of Finance, forthcoming (2014).Google Scholar
Kaplan, S. M. “Top Executives, Turnover, and Firm Performance in Germany.” Journal of Law, Economics, and Organization, 10 (1994), 142–159.CrossRefGoogle Scholar
Kaplan, S. M., and Minton, B.. “How Has CEO Turnover Changed?” International Review of Finance, 12 (2012), 57–87.CrossRefGoogle Scholar
Kedia, S., and Rajgopal, S.. “Neighborhood Matters: The Impact of Location on Broad Based Stock Option Plans.” Journal of Financial Economics, 92 (2009), 109–127.CrossRefGoogle Scholar
Kedia, S., and Rajgopal, S.. “Do the SEC’s Enforcement Preferences Affect Corporate Misconduct?” Journal of Accounting and Economics, 51 (2011), 259–278.CrossRefGoogle Scholar
Knyazeva, A.; Knyazeva, D.; and Masulis, R.. “The Supply of Corporate Directors and Board Independence.” Review of Financial Studies, 26 (2013), 1561–1605.CrossRefGoogle Scholar
Lawler, E. “Boards as Overseers of Human Capital.” Directors and Boards, 33 (2009), 56–59.Google Scholar
Lerner, J. “Venture Capitalists and the Oversight of Private Firms.” Journal of Finance, 50 (1995), 301–318.CrossRefGoogle Scholar
Linck, J. S.; Netter, J. M.; and Yang, T.. “The Determinants of Board Structure.” Journal of Financial Economics, 87 (2008), 308–328.CrossRefGoogle Scholar
Linck, J. S.; Netter, J. M.; and Yang, T.. “The Effects and Unintended Consequences of the Sarbanes-Oxley Act on the Supply and Demand for Directors.” Review of Financial Studies, 22 (2009), 3287–3328.CrossRefGoogle Scholar
Mace, M. Directors: Myth and Reality. Cambridge, MA: Harvard University Press (1971).Google Scholar
Malloy, C. “The Geography of Equity Analysis.” Journal of Finance, 60 (2005), 719–755.CrossRefGoogle Scholar
Masulis, R. W., and Mobbs, S.. “Are All Inside Directors the Same? Evidence from the External Directorship Market.” Journal of Finance, 66 (2011), 823–872.CrossRefGoogle Scholar
Masulis, R. W.; Wang, C.; and Xie, F.. “Globalizing the Boardroom: The Effects of Foreign Directors on Corporate Governance and Firm Performance.” Journal of Accounting and Economics, 53 (2011), 527–554.CrossRefGoogle Scholar
Mehran, H. “Executive Compensation Structure, Ownership, and Firm Performance.” Journal of Financial Economics, 38 (1995), 163–184.CrossRefGoogle Scholar
Mobbs, S. “CEOs Under Fire: The Effects of Competition from Inside Directors on Forced CEO Turnover and CEO Compensation.” Journal of Financial and Quantitative Analysis, 48 (2013), 669–698.CrossRefGoogle Scholar
Parrino, R. “CEO Turnover and Outside Succession: A Cross-Sectional Analysis.” Journal of Financial Economics, 46 (1997), 165–197.CrossRefGoogle Scholar
Petersen, M. A. “Information: Hard and Soft.” Working Paper, Northwestern University (2004).Google Scholar
Petersen, M. A., and Rajan, R. G.. “The Benefits of Firm-Creditor Relationships: Evidence from Small-Business Data.” Journal of Finance, 49 (1994), 3–37.CrossRefGoogle Scholar
Petersen, M. A., and Rajan, R. G.. “Does Distance Still Matter? The Information Revolution in Small Business Lending.” Journal of Finance, 57 (2002), 2533–2570.CrossRefGoogle Scholar
Prendergast, C. “What Trade-Off of Risk and Incentives?” American Economic Review Papers and Proceedings, 90 (2000), 421–425.CrossRefGoogle Scholar
Prendergast, C. “The Tenuous Trade-Off between Risk and Incentives.” Journal of Political Economy, 110 (2002), 1071–1102.CrossRefGoogle Scholar
Raheja, C. G. “Determinants of Board Size and Composition: A Theory of Corporate Boards.” Journal of Financial and Quantitative Analysis, 40 (2005), 283–306.CrossRefGoogle Scholar
Ryan, H., and Wiggins, R.. “The Influence of Firm- and Manager-Specific Characteristics on the Structure of Executive Compensation.” Journal of Corporate Finance, 7 (2001), 101–123.CrossRefGoogle Scholar
Shavell, S. “On Moral Hazard and Insurance.” Quarterly Journal of Economics, 93 (1979), 541–562.CrossRefGoogle Scholar
Shivdasani, A., and Yermack, D.. “CEO Involvement in the Selection of New Board Members: An Empirical Analysis.” Journal of Finance, 54 (1999), 1829–1853.CrossRefGoogle Scholar
Smith, C. “Globalization of Financial Markets.” Carnegie-Rochester Conference Series on Public Policy, 34 (1991), 77–96.CrossRefGoogle Scholar
Smith, C., and Watts, R.. “The Investment Opportunity Set and Corporate Financing, Dividend and Compensation Policies.” Journal of Financial Economics, 31 (1992), 263–292.CrossRefGoogle Scholar
Stein, J. “Information Production and Capital Allocation: Decentralized vs. Hierarchical Firms.” Journal of Finance, 57 (2002), 1891–1921.CrossRefGoogle Scholar
Warner, J. B.; Watts, R. L.; and Wruck, K. H.. “Stock Prices and Top Management Changes.” Journal of Financial Economics, 20 (1988), 461–492.CrossRefGoogle Scholar
Weisbach, M. S. “Outside Directors and CEO Turnover.” Journal of Financial Economics, 20 (1988), 431–460.CrossRefGoogle Scholar
Yermack, D. “Do Corporations Award CEO Stock Options Effectively?” Journal of Financial Economics, 39 (1995), 237–269.CrossRefGoogle Scholar