1 Introduction
Imagine an outsider vacancy occurs on the board of directors of a major corporation. The
board typically sets up a nomination committee in this case, whose task is to identify,
investigate, and evaluate candidates.1 (Ideally) the committee’s goal is to select the most
able of all available outside managers. The difficulty the committee faces in making
this decision is that managerial ability is not directly observable and hard to measure.
Any observable performance measure, e.g., the stock market performance of the company
the manager runs, is bound to be a noisy signal of the manager’s ability: unobservable
managerial effort, unobservable outside factors, and luck all affect company performance.
To form opinions about the potential candidates’ abilities, the committee will combine
information about candidates’ qualifications and past achievements with data on their
performances between the day the vacancy occurs and the final decision. Kaplan and
Reishus (1990) provide evidence that top executive of companies that recently performed
well are more likely to receive additional outside directorships.2 The unobservability of
managerial effort and the fact that current performance may influence the committee’s
decision imply that managers who are aware of being possible candidates for the lucrative
directorship may attempt to improve their chances by ”jamming” the signal about their
ability that the committee observes.3 In particular, a manager may find it profitable to
increase her unobservable effort during what we will call the nomination period in order
to improve her company’s performance and thereby her perceived ability.
A candidate’s incentives to do so may however critically depend on her nomination
chance. Economic theory predicts that a candidate should exert high effort in a close
race, i.e., if she expects to have a realistic chance of being nominated but is not too
confident either. A candidate who expects to be nominated with a very high or a very
low probability, on the other hand, may not have much incentive to change her behavior,
since any improvement in her observed performance in unlikely to affect the final outcome.
We derive these insights in a situation where decision are based on perceived abilities,4
1 Formally, decision rights rest with the shareholders. In practice, however, shareholders almost always
vote for the proposed candidate or slate. See Hermalin and Weisbach (1998).
2 Kaplan and Reishus (1990) use dividend-cuts and industry-adjusted stock returns as performance
measures. They also report that more than 80% of Fortune 500 managers hold either none, one, or two
outside directorships, which suggests that an additional directorship is an important event for a manager.
3The term signal jamming goes back to Holmstrom (1982) who analyzes the dynamic career concerns
of a single worker.
4 Hooffler and Sliwka (2003) derive the same result under the assumption that the precision of the