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Do Outside Directors Face Labor Market Consequences? A Natural Experiment from the Financial Crisis

Harvard Business Law Review, Vol. 4, p. 53, 2014

32 Pages Posted: 14 Jan 2013 Last revised: 21 Feb 2015

Steven Davidoff Solomon

University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy

Andrew Lund

Villanova University School of Law

Robert J. Schonlau

Brigham Young University - Department of Finance

Date Written: September 16, 2013

Abstract

The exogenous shock of the financial crisis made shareholders and regulators particularly attuned to financial firm performance. We thus use the financial crisis as a natural experiment to study labor market consequences for outside directors at banks and other financial companies. Examining 6,507 director years at bank and financial companies over the period from 2006 to 2010 we find that outside director turnover at financial firms is negatively correlated to lagged variables for stock returns. However, the increased chance of being replaced for poor performance is only 0.99% for a one standard deviation change in performance compared to 0.59% at non-financial firms, in either case an arguably trivial amount. We also find limited evidence of salience with respect to the financial crisis. We draw on these empirical findings to assess current board-centered responses to the financial crisis and their failings.

Keywords: board of directors, financial institutions, financial crisis, labor market for directors, board turnover, corporate governance, outside directors

Suggested Citation

Davidoff Solomon, Steven and Lund, Andrew and Schonlau, Robert J., Do Outside Directors Face Labor Market Consequences? A Natural Experiment from the Financial Crisis (September 16, 2013). Harvard Business Law Review, Vol. 4, p. 53, 2014. Available at SSRN: https://ssrn.com/abstract=2200552 or http://dx.doi.org/10.2139/ssrn.2200552

Steven Davidoff Solomon (Contact Author)

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

University of California, Berkeley - Berkeley Center for Law, Business and the Economy ( email )

Berkeley, CA 94720-7200

Andrew Lund

Villanova University School of Law ( email )

299 N. Spring Mill Rd.
Villanova, PA 19085
United States

Robert J. Schonlau

Brigham Young University - Department of Finance ( email )

Marriott School of Management
682 TNRB
Provo, UT 84602
United States
801-422-5879 (Phone)

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