The dark side of outside directors: Do they quit ahead of trouble?

Rüdiger Fahlenbrach (EPF Lausanne)
Monday, November 12, 2012 - 2:00pm
Spandauer Strasse 1, Room 23

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 a 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, have a higher likelihood of being named in a federal class action securities fraud lawsuit, and are more likely to be delisted from a major stock exchange.