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

43 Pages Posted: 19 Apr 2010 Last revised: 21 Dec 2015

See all articles by Rüdiger Fahlenbrach

Rüdiger Fahlenbrach

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; European Corporate Governance Institute (ECGI)

Angie Low

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)

Multiple version iconThere are 3 versions of this paper

Date Written: April 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.

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? (April 2010). NBER Working Paper No. w15917, Available at SSRN: https://ssrn.com/abstract=1590746

Rüdiger Fahlenbrach (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

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Swiss Finance Institute

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European Corporate Governance Institute (ECGI) ( email )

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Angie Low

Nanyang Technological University - Division of Banking & Finance ( email )

Singapore, 639798
Singapore

Rene M. Stulz

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)

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Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

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1000 Brussels
Belgium

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