Why Do Directors Join Poorly Performing Firms?

Abstract

AbstractPrior research has suggested that sitting on the board of a poorly performing firm (PPF) can be undesirable to directors. Still, almost 60% of such firms are able to appoint new directors following director departures. Contrary to a quality matching explanation, we do not find that only poorly performing directors join these firms. Upon joining PPFs, directors are more likely to fill leadership positions without necessarily receiving higher pay. These directors subsequently receive career benefits, especially those who are relatively junior in the pool. As such, the evidence is consistent with the leadership positions providing a certification effect.