Do Outside Directors Tell the Truth, the Whole Truth, and Nothing But the Truth When They Resign?

Posted: 6 Feb 2010 Last revised: 4 Jul 2018

See all articles by Keren Bar-Hava

Keren Bar-Hava

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Sterling Huang

Singapore Management University - School of Accountancy

Benjamin Segal

Fordham University; Hebrew University of Jerusalem

Dan Segal

Interdisciplinary Center (IDC) Herzliyah

Date Written: April 29, 2018

Abstract

We examine the informativeness and credibility of independent directors’ stated resignation reasons. We posit that having access to private information, directors may resign in anticipation of weak future underperformance to limit damage to their reputation, and further have an incentive to mask the reason for the resignation. Results show likelihood of resignation increases with director’s reputation and weak future firm performance. In addition, the evidence is consistent with directors obfuscating the reason for departure by providing benign and unverifiable resignation reasons. Investors seem aware of the disclosure incentives of departing directors and react negatively to such resignations. However, investors, by and large, underreact to the resignation announcement, likely because of the benign reason given for the resignation. Our results suggest that notwithstanding the perception of outside directors’ impartiality and assumed interest alignment with shareholders, independent directors’ personal reputation concerns may conflict with the interests of shareholders to whom they owe fiduciary duties.

Keywords: Independent Directors; Resignation; Disagreement; Reputation; Information Content; Credibility; Verifiability

JEL Classification: D8; G3; G14; K2; M10; M51

Suggested Citation

Bar-Hava, Keren and Huang, Sterling and Segal, Benjamin and Segal, Dan, Do Outside Directors Tell the Truth, the Whole Truth, and Nothing But the Truth When They Resign? (April 29, 2018). Journal of Accounting, Auditing and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1547852 or http://dx.doi.org/10.2139/ssrn.1547852

Keren Bar-Hava

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Jerusalem
Israel

Sterling Huang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore
6808 7929 (Phone)

Benjamin Segal

Fordham University ( email )

113 West 60th Street
New York, NY 10023
United States

Hebrew University of Jerusalem

Dan Segal (Contact Author)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

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