Director Tolerance: Evidence from the Appointments of Outside Directors Who Have Fired CEOs

Abstract

By examining board appointments of outside directors who have previously fired a CEO, we study how directors’ intolerance of failure influences firm performance and risk-taking. Such directors appear to benefit firms with weak monitoring, but hurt firms in innovative industries. Firms appointing an intolerant director subsequently exhibit lower idiosyncratic risk and lower leverage, make less risky acquisitions, experience higher acquisition returns, and are more likely to withdraw bad acquisitions and to replace poorly performing CEOs. They, however, tend to manage earnings when performance deteriorates. Overall, directors’ intolerance of failure appears to influence managerial behavior and shareholder wealth.