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

See all articles by Steven Davidoff Solomon

Steven Davidoff Solomon

University of California, Berkeley - School of Law; European Corporate Governance Institute (ECGI)

Andrew Lund

Villanova University School of Law

Robert J. Schonlau

Colorado State University, Fort Collins - Department of Finance & Real Estate

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 Law Building
Berkeley, CA 94720-7200
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Andrew Lund

Villanova University School of Law ( email )

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

Robert J. Schonlau

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States
9704916280 (Phone)
80523 (Fax)

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