Financial Fraud, Director Reputation, and Shareholder Wealth
43 Pages Posted: 24 Mar 2005
Date Written: April 17, 2006
We investigate the reputational impact of financial fraud for outside directors based on a sample of firms facing shareholder class action lawsuits. Following a financial fraud lawsuit, outside directors do not face abnormal turnover on the board of the sued firm but experience a significant decline in other board seats held. This decline in other directorships is greater for more severe allegations of fraud and when the outside director bears greater responsibility for monitoring fraud. Interlocked firms that share directors with the sued firm exhibit valuation declines at the lawsuit filing. Fraud-affiliated directors are more likely to lose directorships at firms with stronger corporate governance and their departure is associated with valuation increases for these firms.
Keywords: Director reputation, Financial fraud, Interlocking directorships, Class action lawsuits
JEL Classification: G30, G34, J33, K22, M41
Suggested Citation: Suggested Citation