Why Do Directors Join Poorly Performing Firms?

Forthcoming, Journal of Financial and Quantitative Analysis

43 Pages Posted: 5 Oct 2020 Last revised: 3 Dec 2020

Date Written: December 2, 2020

Abstract

Prior research has suggested that sitting on the board of a poorly performing firm can be undesirable to directors. Yet, almost 60% of these firms are able to appoint new directors following director departures. Contrary to a quality matching explanation, we do not find that only poorly performing directors join these firms. Upon joining poorly performing firms, directors are more likely to fill the leadership positions, without necessarily receiving higher pay. These directors subsequently receive career benefits, especially those who are relatively junior in the pool. As such, the evidence is consistent with the leadership positions providing a certification effect.

Keywords: director incentives, director appointments, stock price reaction, director labor market

JEL Classification: G30, G34

Suggested Citation

Dou, Ying and Zhang, Emma Jincheng, Why Do Directors Join Poorly Performing Firms? (December 2, 2020). Forthcoming, Journal of Financial and Quantitative Analysis, Available at SSRN: https://ssrn.com/abstract=3699261 or http://dx.doi.org/10.2139/ssrn.3699261

Ying Dou (Contact Author)

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Emma Jincheng Zhang

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

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