We are under attack: Terrorist attacks and director turnover

Abstract

Motivated by the challenge in the director turnover literature to distinguish between board-initiated dismissals (i.e., ‘clean house’) and director-initiated departures (i.e., ‘jump ship’), we study director turnover in firms local to terrorist attacks (hereafter, TA firms). We argue that director turnover following a terrorist attack is more likely to reflect directors' ‘jump ship’ decision rather than a board's ‘clean house’ decision. We find that directors have a disproportionately greater tendency to leave TA firms after an attack. Further analyses reveal that director turnover is lower when directors perceive the larger benefits or lower costs of staying in TA firms. We also find that directors' decisions to exit or stay are economically meaningful to TA firms and directors themselves. Specifically, by retaining directors, TA firms can reduce their post-attack stock return volatility; by remaining with TA firms, directors will receive more future board seats and committee roles. Overall, our results suggest that the act of staying, in and of itself, signals directors' superior quality within the labour market, and the labour market tends to assess directors' abilities through their turnover decisions after terrorist attacks.