Bankruptcy law penalties and board independence

Aras Canipek

No 488, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: A large theoretical literature suggests that bankruptcy law penalties can reduce agency problems, yet evidence remains scarce. To provide evidence, I examine whether firms implement independent directors as a substitute when penalties are eliminated. For identification, I exploit that penalties are relevant only for risky firms. Across countries, board independence is negatively related to penalties, but only among risky firms. Comparing board independence of risky and safe firms around bankruptcy reforms in Germany, Italy, and the US confirms the results. Economically, risky firms increase the number of independent directors by 21% relative to safe firms following the elimination of penalties.

Keywords: bankruptcy law; board independence; debt; corporate governance (search for similar items in EconPapers)
JEL-codes: G32 G33 G34 G38 K22 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:343059

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