Working Paper: NBER ID: w15917
Authors: Rüdiger Fahlenbrach; Angie Low; Ren M. Stulz
Abstract: Outside directors have incentives to resign to protect their reputation or to avoid an increase in their workload when they anticipate that the firm on whose board they sit will perform poorly or disclose adverse news. We call these incentives the dark side of outside directors. We find strong support for the existence of this dark side. Following surprise director departures, affected firms have worse stock and operating performance, are more likely to suffer from an extreme negative return event, are more likely to restate earnings, and have a higher likelihood of being named in a federal class action securities fraud lawsuit.
Keywords: outside directors; director turnover; firm performance; corporate governance
JEL Codes: G30; G32; G34; G38; K22; M40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| outside director resignations (G34) | firm performance (L25) |
| poor firm performance (L25) | outside director resignations (G34) |
| outside director resignations (G34) | stock performance (G12) |
| outside director resignations (G34) | earnings restatement (G35) |
| outside director resignations (G34) | class action lawsuits (K41) |