NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The dark side of outside directors: Do they quit when they are most needed?

Rüdiger Fahlenbrach, Angie Low, René M. Stulz

NBER Working Paper No. 15917
Issued in April 2010
NBER Program(s):   CF

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.

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Document Object Identifier (DOI): 10.3386/w15917

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