Activist-appointed Directors

We investigate how governance reform affects board functioning and firm value through the labor market channel. We find that unseasoned independent directors (UIDs), directors entering the director labor market for the first time, are an important source of labor supply after the 2002 enactment of the Sarbanes-Oxley Act (SOX) when the director labor shortage is particularly acute. Although investors on average react negatively to a firm’s decisions to appoint UIDs in the pre-SOX period, this negative reaction is completely negated in the post-SOX era. Moreover, boards with UIDs generally do not underperform those with only seasoned independent directors, especially in the post-SOX periods. In some corporate policies such as CEO turnover and compensation decisions, we find that boards with UIDs perform better than boards without UIDs post-SOX. UIDs are more likely to be appointed to monitoring committees such as audit, nominating/governance, and compensation committees in the post-SOX period relative to the pre-SOX period. Overall, our findings highlight the positive impact of governance reform on board functioning and firm value through its influence on directorial labor markets.