How Do Independent Directors View Powerful Executive Risk-Taking Incentives? A Quasi-Natural Experiment
17 Pages Posted: 7 Jan 2019
Date Written: December 23, 2018
Motivated by agency theory, we explore how independent directors view managerial risk-taking incentives using a natural experiment. We exploit the passage of the Sarbanes-Oxley Act as an exogenous shock that raised board independence. Our difference-in-difference estimates show that independent directors view powerful risk-taking incentives unfavorably. Our results are consistent with the notion that strong managerial risk-taking incentives lead to excessive risk-taking and, as a result, are reduced in the presence of more effective governance, i.e. stronger board independence. Further analysis confirms the results, including fixed- and random-effects analysis, propensity score matching, and using Oster’s (2017) method to test coefficient stability.
Keywords: independent directors, corporate governance, natural experiment, vega, risk-taking, exogenous shock
JEL Classification: G32, G34
Suggested Citation: Suggested Citation