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

85 Pages Posted: 14 Sep 2018 Last revised: 7 Dec 2020

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; European Corporate Governance Institute (ECGI)

Ankit Kalda

Indiana University - Kelley School of Business - Department of Finance

Date Written: October 8, 2020

Abstract

We show that firms take more (but not necessarily excessive) risks when one of their directors experiences a corporate bankruptcy at another firm where they concurrently serve as a director. This increase in risk-taking is concentrated among firms where the director experiences a shorter, less-costly bankruptcy and where the affected director likely exerts greater influence and serves in an advisory role. The findings show that individual directors, not just CEOs, can influence a wide range of corporate outcomes. The findings also suggest that individuals actively learn from their experiences and that directors tend to lower their estimate of distress costs after participating in a bankruptcy firsthand.

Keywords: directors, bankruptcy, risk, experience, beliefs

JEL Classification: G34, G40, G41, D84, 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 (October 8, 2020). Kelley School of Business Research Paper No. 18-78, European Corporate Governance Institute – Finance Working Paper No. 648/2020, Journal of Financial Economics (JFE), Forthcoming, 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

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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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