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The Dark Side of Outside Directors: Do They Quit When They are Most Needed?Rüdiger FahlenbrachEcole Polytechnique Fédérale de Lausanne; Swiss Finance Institute Angie LowNanyang Technological University - Division of Banking & Finance Rene M. StulzOhio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI) March 1, 2010 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 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.
Number of Pages in PDF File: 48 Keywords: Director departures, reputational concerns, director monitoring JEL Classification: G30, G32, G34, G38, K22, M40 working papers seriesDate posted: April 12, 2010 ; Last revised: September 27, 2010Suggested CitationContact Information
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