Financial Fraud, Director Reputation, and Shareholder Wealth

43 Pages Posted: 24 Mar 2005  

Eliezer M. Fich

Drexel University - Department of Finance

Anil Shivdasani

University of North Carolina Kenan-Flagler Business School

Date Written: April 17, 2006

Abstract

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

Fich, Eliezer M. and Shivdasani, Anil, Financial Fraud, Director Reputation, and Shareholder Wealth (April 17, 2006). AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=687412 or http://dx.doi.org/10.2139/ssrn.687412

Eliezer M. Fich (Contact Author)

Drexel University - Department of Finance ( email )

LeBow College of Business
3220 Market Street – 11th Floor
Philadelphia, PA 19104
(215) 895-2304 (Phone)

Anil Shivdasani

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-3182 (Phone)
919-962-2068 (Fax)

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