Distance , Information Acquisition , and Monitoring by the Board of Directors

We use data on over 4,000 residential addresses to study the determinants and implications of geographic distance between corporate board members and headquarters. Our tests show that, after controlling for a variety of factors, directors tend to reside closer to headquarters when a firm has fewer capital-intensive assets or more intangibles. We also document that top management turnover is more sensitive to “hard” information (i.e., stock performance) when directors reside at greater distances from headquarters. In addition, board distance is unrelated to CEO cash compensation but positively related to the level and pay-to-performance sensitivity of CEO equity compensation. Thus, a board’s proximity to headquarters appears to be related to the ease with which it can obtain “soft” information and use it to monitor top management. Overall, our results shed light on how geographic distance from headquarters affects the board’s role as intermediary between the firm’s top management and its outside directors. We thank Daniel Greene, Huimin Li, and Lin Miao for excellent research assistance and Satish Mudduluru for programming assistance. The authors assume responsibility for any errors. Comments are welcome. *Author contact information: Department of Finance, J. Mack Robinson College of Business, Georgia State University, Atlanta, GA 30303, USA. Tel. : +1-404-413-7319; Email: zalam@gsu.edu (Z. Alam); Tel. : +1-404-4137339; Email: machen@gsu.edu (M. Chen); Tel. : +1-404-413-7462; Email: cciceotello@gsu.edu (C. Ciccotello); Tel. : +1404-413-7337; Email: cryan@gsu.edu (H. Ryan) Distance, Information Acquisition, and Monitoring by the Board of Directors Recent empirical evidence underscores the influence of geographic distance in a number of financial contexts, including venture capital (Lerner (1995)), banking (Petersen and Rajan (1994, 2002); Degryse and Ongena (2005)), equity analysis (Malloy (2005)), and investment management (Coval and Moskowitz (1999, 2001)). A general conclusion from these studies is that physical distance can hinder the acquisition of firm-specific information by market participants or market professionals. Within the context of corporate governance, finance theorists (e.g., Hermalin and Weisbach (1998); Raheja (2005); Adams and Ferreira (2007); Harris and Raviv (2008)) argue that information plays an important role in corporate directors’ monitoring of top management. These two strands of the literature suggest that directors’ geographic distance from headquarters could be an important dimension of governance. However, to date there has been an absence of research exploring the connection between geographic distance from headquarters and corporate directors’ monitoring activities. In this paper, we examine empirically how geographic distances between corporate directors and headquarters relate to monitoring by the board. We posit that geographic distance matters for board decision-making because certain kinds of information used in monitoring are “soft,” i.e., not easily quantified or verified. As suggested by Petersen (2004), such soft information can only be obtained from personal observation or face-to-face contact with informed individuals. Moreover, soft information is not transferrable: the user of soft information must be the same individual who collects. Hence, distance will matter for board governance insofar as directors who reside farther from headquarters face a greater cost of obtaining soft information about the firm.