Reputation concerns create strong incentives for independent directors to be viewed externally as capable monitors as well as to retain their most valuable directorships. In our paper, Reputation Incentives of Independent Directors: Impacts on Board Monitoring and Adverse Corporate Actions, which was recently made publicly available on SSRN, we extend this literature significantly by examining the effects of differential reputation incentives across firms that arise when a director holds multiple directorships.
Firms having boards composed of a greater portion of independent directors for whom this directorship represents one of their most prestigious are associated with firm actions known to reward directors and are negatively associated with firm actions known to be costly to director reputations. Specifically, they are associated with a lower likelihood of covenant violations, earnings management, earnings restatements, shareholder class action suits and dividend reductions. In addition, we also find they are positively associated with stock repurchases and dividend increases.