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Speaker’s Name: YoungSang Kim (Professor/Northern Kentucky University)

Abstract:

Motivated by agency theory, we explore the effect of co-opted directors, i.e. directors appointed after the incumbent CEO assumes office, on corporate risk taking. Our results show that a higher proportion of co-opted directors on the board leads to significantly higher corporate risk-taking, as reflected by the substantially higher volatility in stock returns and a higher standard deviation of Tobin’ q. The evidence is consistent with the notion that co-opted directors represent a weakened governance mechanism that allows managers to take more risk. Additional tests show that endogeneity is unlikely, including a fixed-effects analysis, an instrumental-variable analysis, propensity score matching, and an analysis where we exploit the Sarbanes-Oxley Act as an exogenous regulatory shock that raises board co-option. Crucially, our evidence shows that board co-option can explain the extent of corporate risk-taking much better than does board independence, which has been the dominant measure of board quality in the literature.

Keywords:   co-opted   directors,   co-option,   risk-taking,   agency   theory,   corporate   governance,   board of directors