Journal
FINANCE RESEARCH LETTERS
Volume 39, Issue -, Pages -Publisher
ACADEMIC PRESS INC ELSEVIER SCIENCE
DOI: 10.1016/j.frl.2020.101538
Keywords
Co-option; Co-opted directors; Financial crisis; Firm risk; Corporate governance
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Research shows that co-opted directors appointed after the CEO's tenure can help companies reduce risks during crises, as they can reflect managers' risk preferences and adopt more conservative risk management strategies.
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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