A model of the supply of executives for outside directorships

Why do firms allow their executives to accept outside directorships? Are firms acting in the best interests of their shareholders by allowing them to do so? We develop a theoretical model where accepting an outside directorship alters the CEO's effect on the value of the home firm. Our model illustrates that executives will choose to spend more time on external directorships than is optimal for the home firm. Our theoretical model is consistent with other recent empirical finance research on the effects of external directorships.