Director Independence and Insider Trading
60 Pages Posted: 19 Nov 2011 Last revised: 25 May 2016
Date Written: February 15, 2013
We provide evidence that outside directors’ trading and ratification decisions are incrementally useful in assessing their independence. Because crises test the independence of boards, we first investigate the CEO replacement decision in firms caught intentionally misreporting earnings. We predict and find that outside directors’ selling that emulates selling by the CEO and inside directors makes them appear aligned and thus less willing to replace the CEO. Our findings derive from opportunistic rather than routine selling, and from collusive selling involving inside and outside board members rather than from selling by outside directors alone. We also predict and find that outside directors who ratify one or more value-destroying mergers in the misreporting period are less willing to replace the CEO. We further test the usefulness of our proxies for board independence on the Execucomp universe and find that firms whose boards exhibit collusive trading and ratify value-destroying mergers overpay their CEOs and are less likely to force CEO turnover.
Keywords: CEO turnover, CFO turnover, fraud, restatements, board independence, insider trading
JEL Classification: G31, G32, G43, M40
Suggested Citation: Suggested Citation