It's Not So Bad: Director Bankruptcy Experience and Corporate Risk-Taking
85 Pages Posted: 14 Sep 2018 Last revised: 7 Dec 2020
Date Written: October 8, 2020
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: Suggested Citation