Review of Accounting Studies

, Volume 22, Issue 1, pp 320–360 | Cite as

Go before the whistle blows: an empirical analysis of director turnover and financial fraud

  • Yanmin Gao
  • Jeong-Bon Kim
  • Desmond TsangEmail author
  • Haibin Wu


This study investigates whether outside directors are aware of financial fraud. Our analysis focuses on the abnormal turnover of these directors during the fraud committing period, before fraud is discovered and before lawsuits are filed. Our empirical analysis shows that, during the fraud committing period, outside directors in fraud firms exhibit an abnormal level of turnover. Examining the characteristics of outside directors and boards at these fraud firms, we find strong evidence that female directors, directors who have greater stock ownership in the firm, and directors with multiple directorships at other firms are more likely to depart fraud firms. We also find some evidence that board size, number of meetings, and fraction of financial experts are related to abnormal turnover in fraud firms during the fraud committing period. We show that abnormal director turnover is significantly higher for fraud that is considered more egregious (i.e., involving fictitious transactions and disclosure problems). Lastly, directors are more likely to depart fraud firms with more serious fraud, as proxied by higher ex-post settlement amounts and longer fraud duration.


Financial fraud Board of director turnover Director and board characteristics Fictitious transaction Disclosure problem 

JEL classification

G30 G34 K22 M41 



We appreciate the valuable comments from Patricia Dechow (the editor), an anonymous referee, David Farber, Weili Ge, and Oliver Li. Earlier versions of the paper were presented at the 2013 AAA Western Regional Meeting, the 2013 CAAA Annual Conference, the 2013 ATINER International Conference on Accounting, and the 2014 AAA Annual Meeting. We thank participants and discussants of the aforementioned conferences as well as doctoral seminar participants at City University of Hong Kong, Fudan University, and University of Waterloo for their comments and suggestions. We gratefully acknowledge financial support from the City University of Hong Kong, Fonds de Recherche du Québec – Société et Culture, and McGill University. All errors are, of course, ours.


  1. Adams, R. B., & Ferreira, D. (2008). Do directors perform for pay? Journal of Accounting and Economics, 46(1), 154–171.CrossRefGoogle Scholar
  2. Adams, R. B., & Ferreira, D. (2009). Women in the boardroom and their impact on governance and performance. Journal of Financial Economics, 94(2), 291–309.CrossRefGoogle Scholar
  3. Adams, R. B., Hermalin, B. E., & Weisbach, M. S. (2010). The role of boards of directors in corporate governance: a conceptual framework and survey. Journal of Economic Literature, 48(1), 58–107.CrossRefGoogle Scholar
  4. Agrawal, A., & Chadha, S. (2005). Corporate governance and accounting scandals. Journal of Law and Economics, 48(2), 371–406.CrossRefGoogle Scholar
  5. Agrawal, A., & Chen, M. (2009). Boardroom brawls: an empirical analysis of disputes involving directors. Working paper: University of Alabama.Google Scholar
  6. Agrawal, A., & Cooper, T. (2016). Corporate governance consequences of accounting scandals: evidence from top management, CFO and auditor turnover. Quarterly Journal of Finance. doi: 10.1142/S2010139216500142.
  7. Agrawal, A., Jaffe, J. F., & Karpoff, J. M. (1999). Management turnover and governance changes following the revelation of fraud. Journal of Law and Economics, 42(1), 309–342.CrossRefGoogle Scholar
  8. Alexander, J. C. (1991). Do the merits matter? A study of settlements in securities class action. Stanford Law Review, 43(3), 497–598.CrossRefGoogle Scholar
  9. Arthaud-Day, M. L., Certo, S. T., Dalton, C. M., & Dalton, D. R. (2006). A changing of the guard: executive and director turnover following corporate financial restatements. Academy of Management Journal, 49(6), 1119–1136.CrossRefGoogle Scholar
  10. Association of Chartered Certified Accountants. (2008). Resigning from a board: guidance for directors. ACCA Discussion Paper.Google Scholar
  11. Asthana, S., & Balsam, S. (2007). Determinants of outside director turnover. Working paper, University of Texas at San Antonio and Temple University.Google Scholar
  12. Barber, B. M., & Lyon, J. D. (1996). Detecting abnormal operating performance: the empirical power and specification of test statistics. Journal of Financial Economics, 41(3), 359–399.CrossRefGoogle Scholar
  13. Barber, B. M., & Odean, T. (2001). Boys will be boys: gender, overconfidence, and common stock investment. Quarterly Journal of Economics, 116(1), 261–292.CrossRefGoogle Scholar
  14. Bar-Hava, K., Huang, S., Segal, B., & Segal, D. (2013). Do outside directors tell the truth, the whole truth, and nothing but the truth when they resign? Working paper, interdisciplinary center, Herzliya, and Hebrew University of Jerusalem.Google Scholar
  15. Beasley, M. S. (1996). An empirical analysis of the relation between the board of director composition and financial statement fraud. The Accounting Review, 71(4), 443–465.Google Scholar
  16. Beneish, M. D. (1999). Incentives and penalties related to earnings overstatements that violate GAAP. The Accounting Review, 74(4), 425–457.CrossRefGoogle Scholar
  17. Bernardi, R., & Arnold, S. D. (1997). An examination of moral development within public accounting by gender, staff level, and firm. Contemporary Accounting Research, 14(4), 653–668.CrossRefGoogle Scholar
  18. Black, B., Cheffins, B. R., & Klausner, M. (2006). Outside director liability. Stanford Law Review, 58(4), 1055–1159.Google Scholar
  19. Bonime-Blanc, A. (2013). The global ethicist – executive whistleblowing: what to do when no one listens. Ethical Corporation. Available via Cited 5 Nov 2015.Google Scholar
  20. Bonner, S. E., Palmrose, Z.-V., & Young, S. M. (1998). Fraud type and auditor litigation: an analysis of SEC accounting and auditing enforcement releases. The Accounting Review, 73(4), 503–532.Google Scholar
  21. Bowen, R. M., Call, A. C., & Rajgopal, S. (2010). Whistle-blowing: target firm characteristics and economic consequences. The Accounting Review, 85(4), 1239–1271.CrossRefGoogle Scholar
  22. Brickley, J. A., Coles, J. S., & Terry, R. L. (1994). Outside directors and the adoption of poison pills. Journal of Financial Economics, 35(3), 371–390.CrossRefGoogle Scholar
  23. Brochet, F., & Srinivasan, S. (2014). Accountability of independent directors – evidence from firms subject to securities litigation. Journal of Financial Economics, 111(2), 430–449.CrossRefGoogle Scholar
  24. Brooks, P., & Zank, H. (2005). Loss averse behavior. Journal of Risk and Uncertainty, 31(3), 301–325.CrossRefGoogle Scholar
  25. Buchanan, B. (1974). Building organizational commitment: the socialization of managers in work organizations. Administrative Science Quarterly, 19(4), 533–546.CrossRefGoogle Scholar
  26. Byrd, J. W., & Hickman, K. A. (1992). Do outside directors monitor managers? Evidence from tender offer bids. Journal of Financial Economics, 32(2), 195–221.CrossRefGoogle Scholar
  27. Chaney, P. K., Jeter, D. C., & Shivakumar, L. (2004). Self-selection of auditors and audit pricing in private firms. The Accounting Review, 79(1), 51–72.CrossRefGoogle Scholar
  28. Cohen, J. R., Pant, L. W., & Sharp, D. J. (1998). The effect of gender and academic discipline diversity on the ethical evaluations, ethical intentions and ethical orientation of potential public accounting recruits. Accounting Horizons, 12(3), 250–270.Google Scholar
  29. Cohn, S. (2006). Board diversity increases slowly. Institutional Shareholder Services – Corporate Governance Blog.Google Scholar
  30. Dalton, D. R., Daily, C. M., Johnson, J. L., & Ellstrand, A. E. (1999). Number of directors and financial performance: a meta-analysis. Academy of Management Journal, 42(6), 674–686.CrossRefGoogle Scholar
  31. Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1996). Causes and consequences of earnings manipulation: an analysis of firms subject to enforcement actions by the SEC. Contemporary Accounting Research, 13(1), 1–36.CrossRefGoogle Scholar
  32. Dechow, P. M., Ge, W., Larson, C. R., & Sloan, R. G. (2011). Predicting material accounting misstatements. Contemporary Accounting Research, 28(1), 17–82.CrossRefGoogle Scholar
  33. DeFond, M. L., & Jiambalvo, J. (1991). Incidence and circumstances of accounting errors. The Accounting Review, 66(3), 643–655.Google Scholar
  34. DeFond, M. L., Hann, R., & Hu, X. (2005). Does the market value financial expertise on audit committees of boards of directors? Journal of Accounting Research, 43(2), 153–193.CrossRefGoogle Scholar
  35. Desai, H., Hogan, C. E., & Wilkins, M. S. (2006). The reputational penalty for aggressive accounting: earnings restatements and management turnover. The Accounting Review, 81(1), 83–112.CrossRefGoogle Scholar
  36. Dewally, M., & Peck, S. W. (2010). Upheaval in the boardroom: outside director public resignations, motivations, and consequences. Journal of Corporate Finance, 16(1), 38–52.CrossRefGoogle Scholar
  37. Duchin, R., Matsusaka, J. G., & Ozbas, O. (2010). When are outside directors effective? Journal of Financial Economics, 96(2), 195–214.CrossRefGoogle Scholar
  38. Dyck, A., Morse, A., & Zingales, L. (2010). Who blows the whistle on corporate fraud? Journal of Finance, 65(6), 2213–2253.CrossRefGoogle Scholar
  39. Eisenberg, T. S., Sundgren, S., & Wells, M. (1998). Larger board size and decreasing firm value in small firms. Journal of Financial Economics, 48(1), 35–54.CrossRefGoogle Scholar
  40. Erickson, M., Hanlon, M., & Maydew, E. L. (2006). Is there a link between executive equity incentives and accounting fraud? Journal of Accounting Research, 44(1), 113–143.CrossRefGoogle Scholar
  41. Fahlenbrach, R., Low, A., & Stulz, R. M. (2013). The dark side of outside directors: do they quit ahead of trouble? Working paper, EPFL, Nanyang business school, and Ohio State University.Google Scholar
  42. Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law and Economics, 26(2), 301–325.CrossRefGoogle Scholar
  43. Fanto, J. (2004). Whistleblowing and the public director: countering corporate inner circles. Oregon Law Review, 83(2), 435–540.Google Scholar
  44. Farber, D. B. (2005). Restoring trust after fraud: does corporate governance matter? The Accounting Review, 80(2), 539–561.CrossRefGoogle Scholar
  45. Feng, M., Ge, W., Li, C., & Nagarajan, N. J. (2010). How do earnings manipulators guide investors? Working paper: University of Pittsburg.Google Scholar
  46. Feng, M., Ge, W., Luo, S., & Shevlin, T. (2011). Why do CFOs become involved in material accounting manipulation? Journal of Accounting and Economics, 51(1), 21–36.CrossRefGoogle Scholar
  47. Ferris, S. P., Jagannathan, M., & Pritchard, A. C. (2003). Too busy to mind the business? Monitoring by directors with multiple board appointments. Journal of Finance, 58(3), 1087–1111.CrossRefGoogle Scholar
  48. Fich, E. M., & Shivdasani, A. (2006). Are busy boards effective monitors? Journal of Finance, 61(2), 689–724.CrossRefGoogle Scholar
  49. Fich, E. M., & Shivdasani, A. (2007). Financial fraud, director reputation, and shareholder wealth. Journal of Financial Economics, 86(2), 306–336.CrossRefGoogle Scholar
  50. Gerety, M., & Lehn, K. (1997). The causes and consequences of accounting fraud. Managerial and Decision Economics, 18(7–8), 587–599.CrossRefGoogle Scholar
  51. Gul, F. A., Srinidhi, B., & Tsui, J. (2008). Board diversity and the demand for higher audit effort. Working paper: Hong Kong Polytechnic University.Google Scholar
  52. Gupta, M., & Fields, L. P. (2009). Board independence and corporate governance: evidence from director resignations. Journal of Business Finance and Accounting, 36(1&2), 161–184.CrossRefGoogle Scholar
  53. Harris, M., & Raviv, A. (2008). A theory of board control and size. Review of Financial Studies, 21(4), 1797–1832.CrossRefGoogle Scholar
  54. Helland, E. (2004). A secondary market test of the merits of class action securities litigation: evidence from the reputation of corporate directors. Claremont McKenna College: Working paper.Google Scholar
  55. Hermalin, B. E., & Weisbach, M. S. (1998). The determinants of board composition. RAND Journal of Economics, 19(4), 589–606.CrossRefGoogle Scholar
  56. Hermalin, B. E., & Weisbach, M. S. (2003). Endogenously determined institution: a survey of the economics literature. FRBNY Economic Policy Review, April, 7–26.Google Scholar
  57. Holthausen, R., & Larcker, D. (1993). Board of directors, ownership structure and CEO compensation. Working paper: University of Pennsylvania and Stanford University.Google Scholar
  58. Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. Journal of Finance, 48(3), 831–880.CrossRefGoogle Scholar
  59. Jianakoplos, N. A., & Bernasek, A. (1998). Are women more risk averse? Economic Inquiry, 36(4), 620–630.CrossRefGoogle Scholar
  60. Johnson, S. A., Ryan Jr., H. E., & Tian, Y. S. (2009). Managerial incentives and corporate fraud: the sources of incentives matter. Review of Finance, 13(1), 115–145.CrossRefGoogle Scholar
  61. Karpoff, J. M., Lee, D. S., & Martin, G. S. (2008). The consequences to managers for financial misrepresentation. Journal of Financial Economics, 88(2), 193–215.CrossRefGoogle Scholar
  62. Klein, A. (2002). Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics, 33(3), 375–400.CrossRefGoogle Scholar
  63. Kumar, P., & Sivaramakrishnan, K. (2008). Who monitors the monitor: the effect of board independence on executive compensation and firm value. Review of Financial Studies, 21(3), 1371–1401.CrossRefGoogle Scholar
  64. Laux, V. (2010). Effects of litigation risk on board oversight and CEO incentive pay. Management Science, 56(6), 938–948.CrossRefGoogle Scholar
  65. Lennox, C. S., Francis, J. R., & Wang, Z. (2012). Selection models in accounting research. The Accounting Review, 87(2), 589–616.CrossRefGoogle Scholar
  66. Lin, L. (1996). The effectiveness of outside directors as a corporate governance mechanism: theories and evidence. Northwestern University Law Review, 90, 898.Google Scholar
  67. Romano, R. (1989). What went wrong with directors’ and officers’ liability insurance? Delaware Journal of Corporate Law, 1, 1–2.Google Scholar
  68. Rosener, J. B. (2003). Women on corporate boards make good business sense. NACD Directorship, 29(5), 7.Google Scholar
  69. Rosenstein, S., & Wyatt, J. G. (1990). Outside directors, board independence, and shareholder wealth. Journal of Financial Economics, 26(2), 175–191.CrossRefGoogle Scholar
  70. Sahlman, W. (1990). Why sane people shouldn’t serve on public boards. Harvard Business Review, 68(3), 28–36.Google Scholar
  71. Schrand, C. M., & Zechman, S. L. C. (2012). Executive overconfidence and the slippery slope to financial misreporting. Journal of Accounting and Economics, 53(1&2), 311–329.CrossRefGoogle Scholar
  72. Skousen, C. J., & Wright, C. J. (2006). Contemporary risk factors and the prediction of financial statement fraud. Working paper, University of Texas at Arlington and Oklahoma State University.Google Scholar
  73. Srinidhi, B., Gul, F. A., & Tsui, J. (2011). Female directors and earnings quality. Contemporary Accounting Research, 28(5), 1610–1644.CrossRefGoogle Scholar
  74. Srinivasan, S. (2005). Consequences of financial reporting failure for outside directors: evidence from accounting restatements and audit committee members. Journal of Accounting Research, 43(2), 291–334.CrossRefGoogle Scholar
  75. Vafeas, N. (1999). Board meeting frequency and firm performance. Journal of Financial Economics, 53(1), 113–142.CrossRefGoogle Scholar
  76. Vafeas, N. (2003). Length of board tenure and outside director independence. Journal of Business Finance and Accounting, 30(7–8), 1043–1064.CrossRefGoogle Scholar
  77. Weisbach, M. S. (1988). Outside directors and CEO turnover. Journal of Financial Economics, 20(1–2), 431–460.CrossRefGoogle Scholar
  78. Xie, B., Davidson III, W. N., & DaDalt, P. J. (2003). Earnings management and corporate governance: the roles of the board and the audit committee. Journal of Corporate Finance, 9(3), 295–316.CrossRefGoogle Scholar
  79. Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 40(2), 185–211.CrossRefGoogle Scholar
  80. Yermack, D. (2004). Remuneration, retention, and reputation incentives for outside directors. Journal of Finance, 59(5), 2281–2308.CrossRefGoogle Scholar
  81. Zhao, Y., & Chen, K. H. (2008). Staggered boards and earnings management. The Accounting Review, 83(5), 1347–1381.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  • Yanmin Gao
    • 1
  • Jeong-Bon Kim
    • 2
  • Desmond Tsang
    • 3
    Email author
  • Haibin Wu
    • 1
  1. 1.College of BusinessCity University of Hong KongKowloon TongHong Kong
  2. 2.School of Accounting and FinanceUniversity of WaterlooWaterlooCanada
  3. 3.Desautels Faculty of ManagementMcGill UniversityMontrealCanada

Personalised recommendations