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Whistleblowers on the Board? The Role of Independent Directors in Cartel Prosecutions

47 Pages Posted: 12 Oct 2015  

Murillo Campello

Cornell University; National Bureau of Economic Research (NBER)

Daniel Ferrés

Universidad de Montevideo

Gaizka Ormazabal

University of Navarra, IESE Business School

Date Written: October 6, 2015

Abstract

Stock market reactions to news of cartel prosecutions are muted when indicted firms have a high proportion of independent directors on their boards. This finding is robust to self-selection and is pronounced when independent directors hold more outside directorships and fewer stock options -- when those directors have fewer economic ties to indicted firms. Results are even stronger when independent directors' appointments were attributable to SOX, preceded their CEO's own appointment, or followed class action suits -- when directors have fewer ties to indicted CEOs. Independent directors serving on indicted firms are penalized by losing board seats and vote support in other firms. Firms with more independent directors are more likely to cooperate with antitrust authorities through leniency programs. They are also more likely to dismiss scandal-laden CEOs after public indictments. Our results show that cartel prosecution imposes significant personal costs onto independent directors and that they take actions to mitigate those costs. We argue that understanding these incentive-compatible dynamics is key in designing strategies for cartel detection and prosecution.

Keywords: Cartel Prosecution, Antitrust Policy, Leniency Programs, Independent Directors, Reputational Costs, Heckman Selection Test

JEL Classification: G30

Suggested Citation

Campello, Murillo and Ferrés, Daniel and Ormazabal, Gaizka, Whistleblowers on the Board? The Role of Independent Directors in Cartel Prosecutions (October 6, 2015). Available at SSRN: https://ssrn.com/abstract=2672696 or http://dx.doi.org/10.2139/ssrn.2672696

Murillo Campello (Contact Author)

Cornell University ( email )

114 East Avenue
369 Sage Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138

Daniel Ferrés

Universidad de Montevideo ( email )

Puntas de Santiago 1604
Montevideo, Montevideo 11500
Uruguay

Gaizka Ormazabal

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

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