Tainted Executives as Outside Directors

45 Pages Posted: 24 Jun 2017 Last revised: 30 Mar 2020

See all articles by Leah Baer

Leah Baer

University of Missouri at Columbia - School of Accountancy

Yonca Ertimur

University of Colorado at Boulder - Department of Accounting

Jingjing Zhang

McGill University - Desautels Faculty of Management

Date Written: March 27, 2020

Abstract

We examine the rationale behind and the consequences of the decision to appoint executives allegedly involved in governance failures (“tainted” executives) as outside directors. We find that firms with greater advising needs as well as those that can benefit more from a given director’s advising ability tend to appoint tainted executives to their boards. Relative to non-tainted executives, tainted executives are less likely to join board committees whose primary function is monitoring. Firms appointing tainted executives to their boards subsequently experience higher growth and similar monitoring outcomes compared to firms that appoint non-tainted executives. Overall, our evidence suggests that firms appoint tainted executives to boards for these individuals’ advising reputation and not in a conspicuous attempt to weaken monitoring. Our results also point to a “soft-landing” for tainted executives in the director labor market.

Keywords: board of directors, director labor market, class action lawsuits, corporate governance

JEL Classification: G34, K22, M41

Suggested Citation

Baer, Leah and Ertimur, Yonca and Zhang, Jingjing, Tainted Executives as Outside Directors (March 27, 2020). AAA 2018 Management Accounting Section (MAS) Meeting, Available at SSRN: https://ssrn.com/abstract=2991803 or http://dx.doi.org/10.2139/ssrn.2991803

Leah Baer

University of Missouri at Columbia - School of Accountancy ( email )

College of Business
Columbia, MO 65211
United States

Yonca Ertimur (Contact Author)

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States

Jingjing Zhang

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5
Canada

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