Do co-opted directors mitigate managerial myopia? Evidence from R&D investments

Abstract

© 2016. We explore the effect of co-opted directors on R&D investments. Co-opted directors are those appointed after the incumbent CEO assumes office. Because a co-opted board represents a weakened governance mechanism that diminishes the probability of executive removal, managers are less likely to be removed and are more motivated to make long-term investments. Our evidence shows that board co-option leads to significantly higher R&D investments. To draw a causal inference, we execute a quasi-natural experiment using an exogenous regulatory shock from the Sarbanes-Oxley Act (SOX). Our results reveal that the effect of board co-option on R&D is more likely causal.