Director compensation as an inducement for director capital

Abstract

In the current study, we examine whether the compensation that directors receive to serve on corporate boards has an inducing effect on the market for directors. More specifically, we examine whether director compensation is related to the human and social capital that directors bring to their boards. As part of our examination, we focus on the passage of the Sarbanes-Oxley Act of 2002 (SOX), which serves as a type of natural experiment, to show that boards increasingly use compensation as a way to attract director capital. We, therefore, tested our hypotheses on a cross-sectional panel sample of 1,704 S&P 1500 firms over the period of 1998 to 2006 (8,332 firm-year observations) using generalized least squares (GLS) regression correcting for first-order auto-regression. Our findings suggest that inducing effects operate in the market for directors and lend particular support to the importance of the resource provision function of boards.