Are All Directors Treated Equally? Evidence from Director Turnover Following Opportunistic Insider Selling

Abstract

This study investigates the likelihood of director turnover following opportunistic insider selling. Given that opportunistic insider selling may be costly to a firm due to potential legal risk and firm legitimacy concerns, we hypothesize that directors engaging in this type of transactions have a higher likelihood of subsequently leaving the board. Using archival data of 11,409 directors in 2280 US firms from 2005 to 2014, univariate comparisons show that directors engaging in opportunistic insider selling are about 8% more likely to exit their firms’ board compared to directors not engaging in this behavior. Furthermore, multivariate results show that the likelihood of director departure following opportunistic insider selling is higher for some directors but not all. Specifically, directors who are especially valuable to the board or costly to replace do not seem to experience elevated levels of turnover. Interestingly, this difference in director turnover is only observed in smaller firms. We find that in larger firms, the likelihood of director turnover following opportunistic insider selling does not depend on director characteristics. As such, results seem to suggest that boards do not homogeneously self-regulate in this context as some directors seem to be shielded from turnover following unethical behavior.

Enforcement of Non‐Compete Agreements, Outside Employment Opportunities, and Insider Trading*

“…In contrast, opportunistic trades and occasional large trades are usually flagged as suspicious targets and could trigger an investigation from the SEC. For example, De Groote et al (2022) find that opportunistic insider trading increases director replacement. Therefore, opportunistic and infrequent traders are likely to avoid large profits from selling their inside ownership to reduce the likelihood of replacement when higher enforcement of non‐compete agreements limits their outside employment opportunities.…”