It's Not So Bad: Director Bankruptcy Experience and Corporate Risk Taking

51 Pages Posted: 14 Sep 2018 Last revised: 28 Feb 2019

See all articles by Radhakrishnan Gopalan

Radhakrishnan Gopalan

Washington University in St. Louis - John M. Olin Business School

Todd A. Gormley

Washington University in St. Louis

Ankit Kalda

Indiana University - Kelley School of Business - Department of Finance

Date Written: February 26, 2019

Abstract

This paper examines whether directors’ experiences influence corporate policy. Using a hand-collected dataset, we document that firms begin taking more risks when one of their directors experiences a corporate bankruptcy at another firm where they concurrently serve as a director. This increase is concentrated among directors experiencing shorter, less-costly bankruptcies, which also tend to not negatively affect directors' careers. The findings suggest directors, on average, lower their estimate of distress costs after experiencing a bankruptcy first-hand. Our findings also suggest that directors, particularly non-independent directors, influence firm policies not only in their monitoring role but also in their advisory capacity.

Keywords: directors, bankruptcy, risk, experience

JEL Classification: G34, G41, G32, G33

Suggested Citation

Gopalan, Radhakrishnan and Gormley, Todd A. and Kalda, Ankit, It's Not So Bad: Director Bankruptcy Experience and Corporate Risk Taking (February 26, 2019). Kelley School of Business Research Paper No. 18-78. Available at SSRN: https://ssrn.com/abstract=3242164 or http://dx.doi.org/10.2139/ssrn.3242164

Radhakrishnan Gopalan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Todd A. Gormley

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
(314) 935-7171 (Phone)

HOME PAGE: http://www.gormley.info

Ankit Kalda (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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