Outside director social network centrality and turnover before stock performance crash: A friend in need?

Abstract

This paper investigates the effect of social connections on outside director turnover before stock performance crashes. We find that outside directors who are more connected with managers through social ties are more likely to leave the firm before a crash. The positive association between turnover and outside director connectedness is robust to different model specifications, measures of crashes and turnovers, and sample selection criteria. Moreover, we document that this positive association is moderated by the concentration of the outside directors' social capital within the current firm and the availability of alternative information channels to the outside directors. Our findings contribute to the literature on the supply side incentives of outside directors by revealing information sharing through social connections as a mechanism through which outside directors assess their firms' future performance and make turnover decisions before crashes.