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The effect of co-opted directors on firm risk during a stressful time: Evidence from the financial crisis

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  • Chaivisuttangkun, Sirithida
  • Jiraporn, Pornsit

Abstract

Co-opted directors are those appointed after the incumbent CEO assumes office. Prior research shows that co-opted directors affect the quality of board monitoring. We explore how co-opted directors influence firm risk during a stressful time, focusing on the financial crisis of 2008. Firms with more co-opted directors experience significantly lower firm risk during the crisis. The results hold for total risk, idiosyncratic risk, and systematic risk. This corroborates the notion that, managers are inherently risk-averse, particularly so during the crisis. Co-opted directors allow managers to adopt corporate policies that reflect their own risk preferences, resulting in lower firm risk.

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  • Chaivisuttangkun, Sirithida & Jiraporn, Pornsit, 2021. "The effect of co-opted directors on firm risk during a stressful time: Evidence from the financial crisis," Finance Research Letters, Elsevier, vol. 39(C).
    • Handle: RePEc:eee:finlet:v:39:y:2021:i:c:s1544612319311328
    DOI: 10.1016/j.frl.2020.101538
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    Cited by:

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    3. Lartey, Theophilus & Danso, Albert & Boateng, Agyenim, 2021. "Co-opted boards and capital structure dynamics," International Review of Financial Analysis, Elsevier, vol. 77(C).

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    More about this item

    Keywords

    Co-option; Co-opted directors; Financial crisis; Firm risk; Corporate governance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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