Board Independence and Default Risk

49 Pages Posted: 25 Jun 2019

See all articles by Ghasan Baghdadi

Ghasan Baghdadi

La Trobe University - La Trobe Business School - Department of Finance

Lily Nguyen

The University of Queensland - UQ Business School

Edward Podolski

Deakin University; Financial Research Network (FIRN)

Date Written: June 19, 2019

Abstract

We conduct a comprehensive examination of the effect that boardroom independence has on corporate default risk. When measuring board independence using the regulatory definition or relying on director’s social ties with the CEO, we find no association with default risk. In contrast, measures of independence based on board co-option are strongly and positively associated with default risk, the incidence of bankruptcy, and technical defaults. We find that our baseline results are not driven by incentive misalignment problems, but rather are the consequence of co-opted boards facilitating poorer quality decision making due to lower engagement and work ethic among board members. We find that external oversight mechanisms, in the form of institutional investors, equity analysts, takeover susceptibility, and media coverage, discipline board members and curtail the negative externalities of co-opted boards. Overall, our study documents new evidence on the adverse effect of co-opted boards on firm default probability.

Keywords: expected default risk, board of directors, agency conflict, governance

JEL Classification: G30, G33, G34

Suggested Citation

Baghdadi, Ghasan and Nguyen, Lily and Podolski, Edward, Board Independence and Default Risk (June 19, 2019). Available at SSRN: https://ssrn.com/abstract=3406924 or http://dx.doi.org/10.2139/ssrn.3406924

Ghasan Baghdadi

La Trobe University - La Trobe Business School - Department of Finance ( email )

Department of Economics and Finance
Victoria 3552, 3086
Australia

Lily Nguyen

The University of Queensland - UQ Business School ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Edward Podolski (Contact Author)

Deakin University ( email )

221 Burwood Highway
Burwood, Victoria 3125
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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