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http://ssrn.com/abstract=1893713
 
 

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The Market Hates a Monitor: The Adverse Selection of Independent Directors Who Oust a CEO


Mary-Hunter McDonnell


Georgetown University - McDonough School of Business

Brayden King


Northwestern University - Kellogg School of Management

July 23, 2011


Abstract:     
Does the market for independent directors always incentivize directors to act in the best interests of shareholders? In this paper, we suggest that the market fails in this regard when the interests of shareholders diverge from the interests of managers, such as when directors must oust an underperforming CEO. Given that managers continue to wield primary influence over the director-selection process, we expect that directors who pursue the interests of shareholders to the detriment of corporate managers will be punished by the market for directors. To test this, we employ a unique longitudinal database that tracks a decade in the careers of a cohort of independent directors. We find evidence that directors who oust a CEO suffer multi-faceted adverse consequences in the market. They are likely to win seats within fewer boards and the boards that do recruit them are likely to be significantly smaller and less reputable than those that recruit their peers. Ultimately, these findings support calls for more deliberate shareholder accountability mechanisms in the market for directors, such as governance provisions that allow for more direct shareholder involvement in director elections.

Number of Pages in PDF File: 24

Keywords: corporate governance, independent directors, ouster

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Date posted: July 23, 2011 ; Last revised: February 23, 2012

Suggested Citation

McDonnell, Mary-Hunter and King, Brayden, The Market Hates a Monitor: The Adverse Selection of Independent Directors Who Oust a CEO (July 23, 2011). Available at SSRN: http://ssrn.com/abstract=1893713 or http://dx.doi.org/10.2139/ssrn.1893713

Contact Information

Mary-Hunter McDonnell (Contact Author)
Georgetown University - McDonough School of Business ( email )
Washington, DC 20057
United States

Brayden King
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
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