The Market for Independent Directors

We study the market for independent directors in the United States during the 1996-2006 period within a supply-demand framework. We find that, in parallel with new governance reforms and escalated public scrutiny, directors generally reduced the number of directorships they held. When making directorship portfolio adjustments during the period when the scrutiny was high, incumbent directors were more likely to depart the firms with higher idiosyncratic risk (e.g. the firms that were costly to monitor and advise). We also document that, despite shrinking supply from the incumbent talent pool, substantial number of unseasoned new directors entered the market so that the increasing demand for independent directors could be satisfied. These new directors were more likely to be recruited by riskier firms after the passage of the Sarbanes-Oxley Act.