The incentives of grey directors: Evidence from unexpected executive and board chair turnover |
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| Institution: | 1. School of Accounting and Finance, Hong Kong Polytechnic University, Hong Kong;2. Lee Shau Kee School of Business and Administration, Open University of Hong Kong, Hong Kong;1. University of Manchester, Manchester Business School, Booth Street West, Manchester M15 6PB, UK;2. University of Groningen, Faculty of Economics and Business, Nettelbosje 2, 9747 AE Groningen, The Netherlands;3. University of Bristol, School of Economics, Finance and Management, 15-19 Tyndalls Park Road, Bristol BS8 1TU, UK;1. School of Management, Hainan University, China;2. School of Accounting, Guangdong University of Foreign Studies, China;3. Macquarie Business School, Macquarie University, Australia;4. School of Management, Jinan University, China |
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| Abstract: | We study the stock market's reaction to the unexpected death of a top executive or board chair for insight into grey director incentives. Whereas there is little debate as to the motives of inside and strict outside directors, the allegiance of grey directors is less certain. We find that grey directors' dominant incentive depends on whether the firm has a succession plan or not. In firms with a succession plan, grey directors' primary motive is to maintain their business ties to the firm. Absent a succession plan, the stock market expects grey directors to use their influence to hire a higher quality replacement, particularly when these directors hold a large equity stake. Our findings suggest that grey directors place their interests as shareholders first when a replacement decision is likely to weaken their business ties with the firm. Grey directors appear to influence the choice of a higher quality replacement whether that person is an insider or outsider. |
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