“Outside Director Social Network Centrality and Turnover before Performance Crashes: A Friend in Need?” by Dr. Julia (Yingri) YU
Dr. Julia (Yingri) YU
Assistant Professor of Accounting
Nanyang Business School
Nanyang Technological University
This paper documents an unintended consequence of information sharing between corporate executives and outside directors. We find that outside directors’ access to private information when combined with the incentive to protect their reputation on the labor market have unintended consequences as manifested by their decisions to leave the firms before performance crashes. Using social network centrality among the firm’s managers as a proxy for the access to private information, we find that outside directors with more access to private information are more likely to leave their firms before performance crashes, consistent with outside directors exploiting their private information to protect their own reputation. The association between network centrality and the likelihood of departure is weaker (stronger) when the costs of leaving (staying) are higher for the outside director, consistent with outside directors trading off the future reputational loss from performance crashes against other types of costs of giving up the current board position.