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Director Independence and Insider Trading

60 Pages Posted: 19 Nov 2011 Last revised: 25 May 2016

Messod Daniel Beneish

Indiana University - Kelley School of Business - Department of Accounting

Cassandra D. Marshall

University of Richmond - Department of Finance

Jun Yang

Indiana University - Kelley School of Business - Department of Finance

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Date Written: February 15, 2013

Abstract

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

Beneish, Messod Daniel and Marshall, Cassandra D. and Yang, Jun, Director Independence and Insider Trading (February 15, 2013). Available at SSRN: https://ssrn.com/abstract=1961740 or http://dx.doi.org/10.2139/ssrn.1961740

Messod Daniel Beneish

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2628 (Phone)
812-855-4985 (Fax)

Cassandra Dawn Marshall

University of Richmond - Department of Finance ( email )

1 Gateway Rd
Richmond, VA 23173
United States

Jun Yang (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3395 (Phone)
812-855-5875 (Fax)

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