CEO outside directorships and managerial efficiency: The role of host board capital
Abstract
Research Question/Issue: Do CEO outside board directorships improve or reduce CEO managerial efficiency? What is the role of host board capital in this relationship?. Research Findings/Insights: We explore the value of CEO outside directorships on managerial efficiency by identifying a unique empirical setting where a CEO's number of outside board seats is exogenously decreased by a merger that eliminates the board of a host firm the CEO is serving on. Using this event as our empirical instrument, we find that outside directorships decrease a CEO's managerial efficiency while host board capital reduces this effect. Theoretical/Academic Implications: Proponents view outside board service as a valuable leadership development tool to mentor the CEO while others promulgating an agency view argue that outside board service detracts from the CEO's ability to improve the efficiency of the home firm as it leads to busyness of the CEO. We shed light on this debate by arguing that CEO outside directorships might reduce CEO's managerial efficiency; however, this effect might be contingent on the characteristics of the host board. Practitioner/Policy Implications: Our findings offer insights to practitioners about the value of multiple directorships and the importance of the host board capital while informing policy makers about the potential restrictions on outside board assignments.