The labor market for directors and externalities in corporate governance: Evidence from the international labor market

We find that the directorial labor market's ability to align the incentives of managers and shareholders depends on investor protection in a country. For example, following a shareholder unfriendly signal in common law countries, directors lose 2.64 times more outside board seats and are 57% more likely to be turned over at their own firm than in civil law countries. Further, outside director appointments are value relevant only strong investor protection countries. Our findings suggest that the labor market as a mechanism to improve corporate governance is least effective in the countries where it is needed the most.