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The Dark Side of Outside Directors: Do they Quit When They are Most Needed?

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Author Info

  • Rüdiger Fahlenbrach

    (Swiss Finance Institute, Ecole Polytechnique Fédérale de Lausanne)

  • Angie Low

    (Nanyang Business School, Nanyang Technological University)

  • René M. Stulz

    (Department of Finance, The Ohio State University,NBER, and ECGI)

Abstract

Outside directors have incentives to resign to protect their reputation or to avoid an increase in their workload when they anticipate that the firm on whose board they sit will perform poorly or disclose adverse news. We call these incentives the dark side of outside directors. We find strong support for the existence of this dark side. Following surprise director departures, affected firms have worse stock and operating performance, are more likely to suffer from an extreme negative return event, are more likely to restate earnings, and have a higher likelihood of being named in a federal class action securities fraud lawsuit.

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Bibliographic Info

Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 10-17.

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Length: 43 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:chf:rpseri:rp1017

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Web page: http://www.SwissFinanceInstitute.ch
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Related research

Keywords: Director departures; reputational concerns; director monitoring;

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References

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  1. Warner, Jerold B. & Watts, Ross L. & Wruck, Karen H., 1988. "Stock prices and top management changes," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 461-492, January.
  2. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2008. "Boards: Does one size fit all," Journal of Financial Economics, Elsevier, vol. 87(2), pages 329-356, February.
  3. Bernard Black & Brian Cheffins & Michael Klausner, . "Outside Director Liability," American Law & Economics Association Annual Meetings 1011, American Law & Economics Association.
  4. Black, Bernard & Kim, Woochan, 2011. "The effect of board structure on firm value: a multiple identification strategies approach using Korean data," MPRA Paper 40283, University Library of Munich, Germany.
  5. Jeffrey L. Coles & Chun-Keung Hoi, 2003. "New Evidence on the Market for Directors: Board Membership and Pennsylvania Senate Bill 1310," Journal of Finance, American Finance Association, vol. 58(1), pages 197-230, 02.
  6. Boone, Audra L. & Casares Field, Laura & Karpoff, Jonathan M. & Raheja, Charu G., 2007. "The determinants of corporate board size and composition: An empirical analysis," Journal of Financial Economics, Elsevier, vol. 85(1), pages 66-101, July.
  7. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  8. David Yermack, 2004. "Remuneration, Retention, and Reputation Incentives for Outside Directors," Journal of Finance, American Finance Association, vol. 59(5), pages 2281-2308, October.
  9. Duchin, Ran & Matsusaka, John G. & Ozbas, Oguzhan, 2010. "When are outside directors effective?," Journal of Financial Economics, Elsevier, vol. 96(2), pages 195-214, May.
  10. William O. Brown, Jr. & Michael T. Maloney, . "Exit, Voice, and the Role of Corporate Directors: Evidence from Acquisition Performance," Claremont Colleges Working Papers 1999-27, Claremont Colleges.
  11. Harford, Jarrad, 2003. "Takeover bids and target directors' incentives: the impact of a bid on directors' wealth and board seats," Journal of Financial Economics, Elsevier, vol. 69(1), pages 51-83, July.
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Cited by:
  1. Kim, Y. Han (Andy), 2013. "Self attribution bias of the CEO: Evidence from CEO interviews on CNBC," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2472-2489.
  2. Tobias Körner, 2012. "Board Accountability and Risk Taking in Banking – Evidence from a Quasi-Experiment," Ruhr Economic Papers 0313, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  3. Balsmeier, Benjamin & Buchwald, Achim & Peters, Heiko, 2011. "Outside board memberships of CEOs: Expertise or entrenchment?," DICE Discussion Papers 26, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  4. Masulis, Ronald W. & Mobbs, Shawn, 2014. "Independent director incentives: Where do talented directors spend their limited time and energy?," Journal of Financial Economics, Elsevier, vol. 111(2), pages 406-429.
  5. Dilger, Alexander, 2012. "How (not) to pay non-executive directors," Discussion Papers of the Institute for Organisational Economics 9/2012, University of Münster, Institute for Organisational Economics.

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