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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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    File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2010/2010-7.pdf
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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. Giovanni Bartolomeo & Paolo Canofari, 2015. "Interlocking Directorates and Concentration in the Italian Insurance Market," Journal of Industry, Competition and Trade, Springer, vol. 15(4), pages 351-362, December.
    3. Balsmeier, Benjamin & Buchwald, Achim & Peters, Heiko, 2011. "Outside board memberships of CEOs: Expertise or entrenchment?," DICE Discussion Papers 26, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    4. 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.
    5. Körner, Tobias, 2012. "Board Accountability and Risk Taking in Banking – Evidence from a Quasi-Experiment," Ruhr Economic Papers 313, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    6. Michael Firth & Sonia Wong & Qingquan Xin & Ho Yin Yick, 2016. "Regulatory Sanctions on Independent Directors and Their Consequences to the Director Labor Market: Evidence from China," Journal of Business Ethics, Springer, vol. 134(4), pages 693-708, April.
    7. Preet Singh & Chitra Singla, 2016. "Impact of Independent Directors’ Resignations on Firm’s Governance," Working Papers id:11037, eSocialSciences.
    8. 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.
    9. repec:kap:jfsres:v:52:y:2017:i:3:d:10.1007_s10693-016-0252-3 is not listed on IDEAS
    10. Singh, Preet Deep & Singla, Chitra, 2016. "Impact of Independent Directors’ Resignations on Firm’s Governance," IIMA Working Papers WP2016-03-36, Indian Institute of Management Ahmedabad, Research and Publication Department.

    More about this item

    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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