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

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

The Quarterly Review of Economics and Finance, 2021, vol. 79, issue C, 330-344

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.

Keywords: Co-opted directors; Co-option; Risk-taking; Agency theory; Corporate governance; Board of directors (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:79:y:2021:i:c:p:330-344

DOI: 10.1016/j.qref.2020.07.003

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