Impact of independent directors’ resignations on firm’s governance

Abstract

Directors are liable for any act of omission or commission. They have a reputation to protect. While Independent directors might engage in passive monitoring; when apprised of a decision where the probability of detection of negligence is higher, they might prefer to abandon ship rather than suffer consequences. Under such circumstances, directors’ resignations could lead to some consequences on firm’s governance. We test this using a sample of more than 2300 resignations during 2006-2014 from firms listed on National Stock Exchange, India. We specifically identify clustered resignations, i.e., when 2 or more people leave the board within the same year for company-specific reasons and see its association with earnings management in the following year.