The Dark Side of Outside Directors: Do They Quit When They are Most Needed?
Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute
Nanyang Technological University - Division of Banking & Finance
René M. Stulz
Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
July 31, 2013
Charles A. Dice Center Working Paper No. 2010-7
Fisher College of Business Working Paper No. 2010-03-007
Swiss Finance Institute Research Paper No. 10-17
ECGI - Finance Working Paper No. 281/2010
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 a 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, have a higher likelihood of being named in a federal class action securities fraud lawsuit, and make worse mergers and acquisitions. Consistent with the market inferring bad news from surprise departures, the announcement return for surprise director departures is negative.
Number of Pages in PDF File: 50
Keywords: Director departures, reputational concerns, director monitoring
JEL Classification: G30, G32, G34, G38, K22, M40
Date posted: April 12, 2010 ; Last revised: August 6, 2013
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