Co-opted Boards, Social Capital, and Risk-taking

Abstract

This study investigates the effect of co-opted boards on corporate risk-taking behavior, as well as the moderating effect of social capital on the relation. We find a positive relation between board co-option and equity volatility. Endogeneity concerns are circumvented using the difference-in-difference methodology. We further find that high social capital surrounding firm headquarters alleviates managers’ risk-taking incentives when corporate governance is weak, and that our results are robust to alternative measures of social capital.