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Whistle-Blowers on the Board? The Role of Independent Directors in Cartel Prosecutions

Murillo Campello et al., The Journal of Law and Economics 60, no. 2 (May 2017): 241-268

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Stock market reactions to news of cartel prosecutions are muted when indicted firms have a high proportion of independent directors on their boards. This finding is robust to self-selection and is pronounced when independent directors hold more outside directorships and fewer stock options -when those directors have fewer economic ties to indicted firms. Results are even stronger when independent directors’ appointments were attributable to SOX, preceded their CEO’s own appointment, or followed class action suits|when directors have fewer ties to indicted CEOs. Independent directors serving on indicted firms are penalized by losing board seats and vote support in other firms. Firms with more independent directors are more likely to cooperate with antitrust authorities through leniency programs. They are also more likely to dismiss scandal-laden CEOs after public indictments. Our results show that cartel prosecution imposes significant personal costs onto independent directors and that they take actions to mitigate those costs. We argue that understanding these incentive-compatible dynamics is key in designing strategies for cartel detection and prosecution.

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