Corporate governance : a study of director liability, firm performance and shareholder wealth
type: CreativeWork
description: This study examines the relationship between the composition of the board of directors, director liability, the firm's performance and shareholder wealth. The existence of a director liability crisis is first examined. Both anecdotal and empirical evidence suggest that such a crisis did indeed occur. The evidence also suggests that the "crisis" primarily hurt firms that were performing poorly. To verify the existence of a "crisis" and to gain insight into the effect director resignations have on firm value, a sample of firms, where more than one director resigned at the same time, is collected. This sample spans the period when it is hypothesized that a crisis occurred and the period following the "crisis". As predicted, shareholders response to directors resignations are significantly different during these two periods. During the "crisis" years the resignation of directors results in a loss to firm value for all firms. The magnitude of the loss is directly related to firm performance. Alternatively, following the "crisis", the relationship between performance and shareholder response to the directors resignation is inverse and not always negative. These results suggest that the board's composition can effect firm value and that during the "crisis" period directors were hard to replace and therefore their resignations reduced firm value. The more negative response from poorly performing firms suggests that for these firms directors are especially valuable. Under normal conditions, i.e., after the "crisis", shareholders view changes in board composition as positive events in firms that are doing poorly, and as a negative signal from firms that are doing well. An examination of the event that legally eliminated the "director liability crisis," i.e., the adoption of provisions eliminating directors' liability, provides further evidence as to the importance of directors to poorly performing firms. Shareholders of poorly performing firms respond positively to the adopti…
abstract: This study examines the relationship between the composition of the board of directors, director liability, the firm's performance and shareholder wealth. The existence of a director liability crisis is first examined. Both anecdotal and empirical evidence suggest that such a crisis did indeed occur. The evidence also suggests that the "crisis" primarily hurt firms that were performing poorly. To verify the existence of a "crisis" and to gain insight into the effect director resignations have on firm value, a sample of firms, where more than one director resigned at the same time, is collected. This sample spans the period when it is hypothesized that a crisis occurred and the period following the "crisis". As predicted, shareholders response to directors resignations are significantly different during these two periods. During the "crisis" years the resignation of directors results in a loss to firm value for all firms. The magnitude of the loss is directly related to firm performance. Alternatively, following the "crisis", the relationship between performance and shareholder response to the directors resignation is inverse and not always negative. These results suggest that the board's composition can effect firm value and that during the "crisis" period directors were hard to replace and therefore their resignations reduced firm value. The more negative response from poorly performing firms suggests that for these firms directors are especially valuable. Under normal conditions, i.e., after the "crisis", shareholders view changes in board composition as positive events in firms that are doing poorly, and as a negative signal from firms that are doing well. An examination of the event that legally eliminated the "director liability crisis," i.e., the adoption of provisions eliminating directors' liability, provides further evidence as to the importance of directors to poorly performing firms. Shareholders of poorly performing firms respond positively to the adopti…
author: Brook, Yaron
language: eng
date published: 1994
date modified: 2026-07-24T05:01:16Z
provider: University of Texas
publisher: Networked Digital Library of Theses and Dissertations
type: WebPage
source organization: University of Texas at Austin

PropertyValue
property ID: Handle
value: http://hdl.handle.net/2152/64190

PropertyValue
property ID: DOI
value: 10.15781/T21V5BW91