The Economics of Independent Director Exit and Voice

64 Pages Posted: 12 Aug 2022 Last revised: 30 Oct 2023

See all articles by Messod D. Beneish

Messod D. Beneish

Indiana University - Kelley School of Business - Department of Accounting

Kai Lu

Shanghai University of Finance and Economics - School of Finance

Zhengwei Wang

Tsinghua University - PBC School of Finance

Jun Yang

Indiana University - Kelley School of Business - Department of Finance

Date Written: May 22, 2022

Abstract

We jointly examine the economic determinants of directors’ exit and dissent decisions using the enactment of China’s New Securities Law (NSL) as a laboratory. NSL substantially raises monetary penalties for failing to detect financial misreporting, and our findings suggest that directors’ decisions are informative about misreporting risk. We show that NSL leads to more frequent resignations, particularly in firms that have a higher ex-ante likelihood of financial misreporting and among directors with greater reputational concerns. We find that dissensions on proposals involving financial reporting issues frequently precede resignations, suggesting that voice and exit are complementary signals of misreporting risk. Stock prices react negatively to director resignations and the effect is stronger among firms with higher misreporting risk. We also find that post NSL, replacement directors have characteristics consistent with lower monitoring ability. Ostensibly to alleviate this unintended consequence, three times as many firms purchase Directors and Officers (D&O) insurance post NSL despite significantly higher premia, and two years after the NSL passes, new regulation that exempts independent directors from penalties under various circumstances.

Keywords: independent director resignations, director dissensions, D&O insurance

JEL Classification: G31, G32, G34, M40.

Suggested Citation

Beneish, Messod Daniel and Lu, Kai and Wang, Zhengwei and Yang, Jun, The Economics of Independent Director Exit and Voice (May 22, 2022). Available at SSRN: https://ssrn.com/abstract=4184012 or http://dx.doi.org/10.2139/ssrn.4184012

Messod Daniel Beneish

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2628 (Phone)
812-855-4985 (Fax)

Kai Lu (Contact Author)

Shanghai University of Finance and Economics - School of Finance ( email )

318 Wuchuan Rd., Wujiaochang, Yangpu District
Shanghai, Shanghai 200437
China

Zhengwei Wang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China

Jun Yang

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3395 (Phone)
812-855-5875 (Fax)

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