Why Do Independent Directors Stay on Board?

Abstract

There is extensive evidence that many directors resign when board service becomes more costly, but little evidence explaining why others remain. We show that restatements, switching to higher-quality auditors, and purchasing D&O insurance reduce the likelihood of resignation. Our analysis centers on China’s New Securities Law of 2020, a scandal-triggered reform that substantially raises penalties for failing to detect misreporting. Director dissent on accounting/reporting issues is more frequent than previously documented and often precedes rather than substitutes for exit. We show that resignations signal higher misreporting risk, and that the likelihood of misreporting is an omitted explanator of director resignations.

Keywords: independent director resignations, director dissensions, restatement, auditor switching, D&O insurance

JEL Classification: G31; G32; G34; M40.