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
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: Suggested Citation