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Do co-opted directors influence corporate risk-taking and credit ratings?

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  • Lee, Sang Mook
  • Jiraporn, Pornsit
  • Kim, Young Sang
  • Park, Keun Jae

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 and its consequences on credit ratings. 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’s q. The evidence is consistent with the notion that co-opted directors bring about less effective board monitoring, which allows managers to take more risk. Finally, we show that co-opted directors lead to significantly lower credit ratings.

Suggested Citation

  • Lee, Sang Mook & Jiraporn, Pornsit & Kim, Young Sang & Park, Keun Jae, 2021. "Do co-opted directors influence corporate risk-taking and credit ratings?," The Quarterly Review of Economics and Finance, Elsevier, vol. 79(C), pages 330-344.
    • Handle: RePEc:eee:quaeco:v:79:y:2021:i:c:p:330-344
    DOI: 10.1016/j.qref.2020.07.003
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    More about this item

    Keywords

    Co-opted directors; Co-option; Risk-taking; Agency theory; Corporate governance; Board of directors;
    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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