How do independent directors view powerful executive risk-taking incentives? A quasi-natural experiment

Viput Ongsakul and Pornsit Jiraporn

Finance Research Letters, 2019, vol. 31, issue C

Abstract: We explore how independent directors view managerial risk-taking incentives using a natural experiment. We exploit the passage of the Sarbanes-Oxley Act as an exogenous shock that raised board independence. Our difference-in-difference estimates show that independent directors view powerful risk-taking incentives unfavorably. Our results are consistent with the notion that strong managerial risk-taking incentives lead to excessive risk-taking and, as a result, are reduced in the presence of more effective governance, i.e. stronger board independence. Further analysis confirms the results, including fixed- and random-effects analysis, propensity score matching, and using Oster's (2017) method to test coefficient stability.

Keywords: Independent directors; Corporate governance; Natural experiment; Vega; Risk-taking; Exogenous shock (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:31:y:2019:i:c:s1544612318308420

DOI: 10.1016/j.frl.2018.12.016

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