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Accountability of independent directors: Evidence from firms subject to securities litigation

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  • Brochet, Francois
  • Srinivasan, Suraj

Abstract

We examine which independent directors are held accountable when investors sue firms for financial and disclosure-related fraud. Investors can name independent directors as defendants in lawsuits, and they can vote against their reelection to express displeasure over the directors’ ineffectiveness at monitoring managers. In a sample of securities class action lawsuits from 1996 to 2010, about 11% of independent directors are named as defendants. The likelihood of being named is greater for audit committee members and directors who sell stock during the class period. Named directors receive more negative recommendations from Institutional Shareholder Services, a proxy advisory firm, and significantly more negative votes from shareholders than directors in a benchmark sample. They are also more likely than other independent directors to leave sued firms. Overall, shareholders use litigation along with director elections and director retention to hold some independent directors more accountable than others when firms experience financial fraud.

Suggested Citation

  • Brochet, Francois & Srinivasan, Suraj, 2014. "Accountability of independent directors: Evidence from firms subject to securities litigation," Journal of Financial Economics, Elsevier, vol. 111(2), pages 430-449.
  • Handle: RePEc:eee:jfinec:v:111:y:2014:i:2:p:430-449
    DOI: 10.1016/j.jfineco.2013.10.013
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Balsmeier, Benjamin & Fleming, Lee & Manso, Gustavo, 2017. "Independent boards and innovation," Journal of Financial Economics, Elsevier, vol. 123(3), pages 536-557.
    2. repec:eee:jocaae:v:13:y:2017:i:3:p:225-243 is not listed on IDEAS
    3. Wei Shi & Brian L. Connelly & Wm. Gerard Sanders, 2016. "Buying bad behavior: Tournament incentives and securities class action lawsuits," Strategic Management Journal, Wiley Blackwell, vol. 37(7), pages 1354-1378, July.
    4. Yanmin Gao & Jeong-Bon Kim & Desmond Tsang & Haibin Wu, 2017. "Go before the whistle blows: an empirical analysis of director turnover and financial fraud," Review of Accounting Studies, Springer, vol. 22(1), pages 320-360, March.
    5. repec:spr:reaccs:v:23:y:2018:i:2:d:10.1007_s11142-017-9435-x is not listed on IDEAS
    6. Beneish, Messod D. & Marshall, Cassandra D. & Yang, Jun, 2017. "Explaining CEO retention in misreporting firms," Journal of Financial Economics, Elsevier, vol. 123(3), pages 512-535.
    7. Crutchley, Claire E. & Minnick, Kristina & Schorno, Patrick J., 2015. "When governance fails: Naming directors in class action lawsuits," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 81-96.
    8. Murillo Campello & Daniel Ferrés & Gaizka Ormazabal, "undated". "Whistleblowers on the Board? The Role of Independent Directors in Cartel Prosecutions," Documentos de Trabajo/Working Papers 1502, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..
    9. repec:eee:corfin:v:45:y:2017:i:c:p:401-427 is not listed on IDEAS
    10. Chakravarty, Sugato & Rutherford, Leann G., 2017. "Do busy directors influence the cost of debt? An examination through the lens of takeover vulnerability," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 429-443.
    11. repec:eee:jaecon:v:63:y:2017:i:2:p:161-178 is not listed on IDEAS
    12. repec:eee:advacc:v:33:y:2016:i:c:p:59-67 is not listed on IDEAS
    13. Campello, Murillo & Ferr�s, Daniel & Ormazabal, Gaizka, 2017. "Whistleblowers on the Board? The Role of Independent Directors in Cartel Prosecutions," CEPR Discussion Papers 12143, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Independent directors; Director reputation; Accountability; Securities litigation; Shareholder voting;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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