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 directors’ turnover decisions in the setting of future performance crashes where the outside directors’ personal interests and their role as an advisor are potentially conflicted. We find that, compared to their less connected peers, outside directors who are more connected with managers through social ties are more likely to leave the firm before it experiences stock performance crashes. This finding is consistent with the notion that outside directors exploit private information from their social connections to protect their personal interests. In addition, we find that the association between the connectedness and turnover is weaker (1) when the director’s connections with managers in the focal firm are more important than his/her other connections; and (2) when the size of the focal firm relative to other firms in the director’s board membership portfolio is larger. This finding suggests that the costs of giving up board seats moderate the association between outside director’s connectedness and the likelihood of turnover before performance crashes.