Abstract

http://ssrn.com/abstract=1585192
 
 

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


Rüdiger Fahlenbrach


Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Angie Low


Nanyang Technological University - Division of Banking & Finance

Rene 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

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 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

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Date posted: April 12, 2010 ; Last revised: August 6, 2013

Suggested Citation

Fahlenbrach, Rüdiger and Low, Angie and Stulz, Rene M., The Dark Side of Outside Directors: Do They Quit When They are Most Needed? (July 31, 2013). Charles A. Dice Center Working Paper No. 2010-7; Swiss Finance Institute Research Paper No. 10-17; ECGI - Finance Working Paper No. 281/2010. Available at SSRN: http://ssrn.com/abstract=1585192 or http://dx.doi.org/10.2139/ssrn.1585192

Contact Information

Rüdiger Fahlenbrach
Ecole Polytechnique Fédérale de Lausanne ( email )
Quartier UNIL-Dorigny
Extranef 211
1015 Lausanne, CH-1015
Switzerland
++41-21-693-0098 (Phone)
++41-21-693-3010 (Fax)
HOME PAGE: http://sfi.epfl.ch/fahlenbrach.html
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Angie Low
Nanyang Technological University - Division of Banking & Finance ( email )
Singapore, 639798
Singapore
Rene M. Stulz (Contact Author)
Ohio State University (OSU) - Department of Finance ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
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