Go Before the Whistle Blows: An Empirical Analysis of Director

• In Event: Financial Accounting and Reporting # 2

Abstract

Corporate board of directors is expected to oversee managers but research shows that this
oversight is imperfect. This study considers whether outside directors are aware of
financial frauds and investigates the question by examining the abnormal turnover of these
directors during the period before frauds are discovered and before lawsuits are filed.
Given that outside directors are subject to various forms of reputational penalties if a fraud
is discovered, we hypothesize that outside directors are more likely to leave the firms,
provided they are able to detect frauds. Our empirical analysis shows that, during the fraud
committing period, there is an abnormal level of turnover of outside directors in fraud
firms. We further examine the characteristics of outside directors and of boards at these
fraud firms, and find that directors who are female, and those who have large stock
ownership at fraud firms, and multiple directorships at other firms are more likely to leave
fraud firms. We also show that board size and the number of meetings are positively
related to abnormal turnover in fraud firms during the fraud committing period.

Authors

• Yanmin Gao, City University of Hong Kong

• Jeong-bon Kim, City University of Hong Kong

• Desmond Tsang, McGill University

• Haibin Wu, University of Alberta