The effect of co-opted directors on firm risk during a stressful time: Evidence from the financial crisis

Abstract

© 2020 Elsevier Inc. 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.