How Do Independent Directors View Powerful Executive Risk-Taking Incentives? A Quasi-Natural Experiment

17 Pages Posted: 7 Jan 2019

See all articles by Viput Ongsakul

Viput Ongsakul

NIDA Business School, National Institute of Development Administration (NIDA)

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS)

Date Written: December 23, 2018

Abstract

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

Ongsakul, Viput and Jiraporn, Pornsit, How Do Independent Directors View Powerful Executive Risk-Taking Incentives? A Quasi-Natural Experiment (December 23, 2018). Available at SSRN: https://ssrn.com/abstract=3305749 or http://dx.doi.org/10.2139/ssrn.3305749

Viput Ongsakul

NIDA Business School, National Institute of Development Administration (NIDA) ( email )

118 Seri Thai Road
Bangkok, 10240
Thailand

Pornsit Jiraporn (Contact Author)

Pennsylvania State University - School of Graduate Professional Studies (SGPS) ( email )

30 E. Swedesford Road
Malvern, PA 19355
United States
(484) 753-3655 (Phone)

HOME PAGE: http://www.personal.psu.edu/pxj11/index1.html

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