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

  • 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)

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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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
Contact details of provider: Web page: http://www.SwissFinanceInstitute.ch

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