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

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  • Fahlenbrach, Rudiger

    (Swiss Finance Institute, Ecole Polytechnique Federale de Lausanne)

  • Low, Angie

    (Nanyang Technological University)

  • Stulz, Rene M.

    (Ohio State University 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.

Suggested Citation

  • Fahlenbrach, Rudiger & Low, Angie & Stulz, Rene M., 2010. "The Dark Side of Outside Directors: Do They Quit When They Are Most Needed?," Working Paper Series 2010-7, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2010-7
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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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