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The relationship between director tenure and director quality

Curtis E. Clements, Ryan K. Jessup, John D. Neill () and Paul Wertheim
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Curtis E. Clements: Abilene Christian University
Ryan K. Jessup: Abilene Christian University
John D. Neill: Abilene Christian University
Paul Wertheim: Abilene Christian University

International Journal of Disclosure and Governance, 2018, vol. 15, issue 3, 142-161

Abstract: Abstract This study seeks to determine whether corporate directors become less effective over time and whether term limits should be placed on their service as corporate board members. Using a sample of over 29,000 firm-year observations, we find a significant positive association between director tenure and director quality at low and intermediate levels of director tenure and a significant negative association at higher levels of director tenure. We also find that the negative effects of having long-tenured directors vary across companies based on certain firm-specific characteristics. We extend prior research in several ways. First, we employ a unique measure of director quality that we calculate by adopting the ranking methodology of the Google PageRank algorithm. Second, in our analysis, we separate directors’ total tenure on corporate boards into what we call “inside tenure” and “outside tenure.” A third contribution is that we demonstrate that the curvilinear relationship between director tenure and director quality differs depending on certain firm-specific characteristics. Our results imply that term limits need to be considered since director quality tends to decrease in the latter years of a director’s service. However, our results demonstrate that not all firms experience the negative effects of director entrenchment equally. Therefore, it would not be appropriate, based on our results, to recommend a specific maximum number of years of service that would apply for all corporate directors.

Keywords: Corporate governance; Director tenure; Board composition; Director evaluation (search for similar items in EconPapers)
Date: 2018
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