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

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.