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Why Do Directors Join Poorly Performing Firms?

Published online by Cambridge University Press:  31 January 2022

Ying Dou Open the ORCID record for Ying Dou [Opens in a new window]  and
Emma Jincheng Zhang
Ying Dou*
Affiliation:
Monash University Department of Banking and Finance
Emma Jincheng Zhang
Affiliation:
Monash University Department of Banking and [email protected]
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

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Prior research has suggested that sitting on the board of a poorly performing firm (PPF) can be undesirable to directors. Still, almost 60% of such firms are able to appoint new directors following director departures. Contrary to a quality matching explanation, we do not find that only poorly performing directors join these firms. Upon joining PPFs, directors are more likely to fill leadership positions without necessarily receiving higher pay. These directors subsequently receive career benefits, especially those who are relatively junior in the pool. As such, the evidence is consistent with the leadership positions providing a certification effect.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 4 , June 2022 , pp. 1564 - 1590
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We would like to thank Robert Schonlau (the referee) for offering detailed comments that have greatly improved the paper. We have benefited from helpful suggestions made by Renée Adams, Stephen Brown, Abe de Jong, Paul Malatesta (the editor), Alireza Tourani-Rad, and participants at the 2018 New Zealand Finance Meeting. We would also like to thank Yifei Miao and Ziyi Wang for providing excellent research assistance. This work started when both authors were doctoral students at the University of New South Wales.

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