Director Liability Protection and the Quality of Outside Directors

83 Pages Posted: 5 Feb 2019 Last revised: 17 Dec 2020

See all articles by Ronald W. Masulis

Ronald W. Masulis

University of New South Wales, Sydney; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Sichen Shen

The University of Hong Kong

Hong Zou

The University of Hong Kong - Faculty of Business and Economics

Date Written: December 9, 2020

Abstract

We investigate how state Universal Demand statutes (UD) that lower the risk of shareholder
derivative lawsuits affect recruiting and retention of outside directors. Using a difference-in-differences analysis, we document improvements in outside director experience following UD
adoptions, especially for firms facing greater litigation risk or smaller local supplies of director
candidates. UD adoptions also make high-quality director candidates from non-UD states firms
more willing to join boards at firms incorporated in UD states. We find some limited evidence that
UD adoptions help attract outside director candidates with better educational and certain
professional backgrounds and reduce voluntary departures of high-quality directors.

Keywords: Legal liability, board of directors, board quality, litigation, derivative suits

JEL Classification: G30, G34

Suggested Citation

Masulis, Ronald W. and Shen, Sichen and Zou, Hong, Director Liability Protection and the Quality of Outside Directors (December 9, 2020). European Corporate Governance Institute – Finance Working Paper No. 672/2020, Available at SSRN: https://ssrn.com/abstract=3329220 or http://dx.doi.org/10.2139/ssrn.3329220

Ronald W. Masulis (Contact Author)

University of New South Wales, Sydney ( email )

UNSW Business School
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European Corporate Governance Institute (ECGI) ( email )

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Financial Research Network (FIRN)

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National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

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Sichen Shen

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Hong Zou

The University of Hong Kong - Faculty of Business and Economics ( email )

China

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