Tainted Executives as Outside Directors

• In Event: Corporate Directors

Abstract

We examine director labor market outcomes for executives allegedly involved in governance failures—tainted executives. Seemingly inconsistent with ex-post settling up, some tainted executives are more likely to gain directorships than non-tainted executives. Less visible firms and firms with greater demand for specialized knowledge tend to appoint tainted executives to their boards. Appointing firms subsequently experience higher sales growth and lower likelihood of litigation. Thus, firms facing a talent shortage trade integrity and monitoring ability for advising ability. Market reacts negatively to these appointments, suggesting investor disappointment in firms’ inability to attract directors highly qualified in both advising and monitoring.

Authors

• Leah Baer, University of Colorado-Boulder

• Yonca Ertimur, University of Colorado-Boulder

• Jingjing Zhang, McGill University