Consequences of Restatements for Outside Directors

Abstract

A significant literature examines the consequences of restatements on outside directors and finds that restatements are associated with outside directors losing seats on the boards of the restating firm and on the boards of other firms. Directors’ losses of board seats are positively associated with the restatement severity and intention but are negatively related to the strength of directors’ external networks. This evidence suggests that directors’ reputations are damaged by involvement with a restatement. I identify two future research opportunities: First, may a director preserve their reputation by departing a board before a restatement is disclosed? Second, does the strength of a director’s network affect the likelihood of a restatement or the director’s attainment of subsequent board seats? Research into this area provides important evidence regarding whether market forces sufficiently discipline those individuals responsible for corporate governance.

Keywords: Restatements, Board of Directors, Labor Market, Corporate Governance

JEL Classification: M41