Does Personal Liability Deter Individuals from Serving as Independent Directors?
50 Pages Posted: 17 Oct 2019 Last revised: 18 Dec 2020
Date Written: December 17, 2020
This study examines whether personal liability for corporate malfeasance deters individuals from serving as independent directors. Exploiting the introduction of personal liability in India, we find that personal liability deters individuals from serving on corporate boards. We find stronger deterrence among firms with a) greater litigation and regulatory risk, b) higher monitoring costs, and c) weak monetary incentive to serve as an independent director. Expert directors are more likely to exit, resulting in 1.16% lower firm value. Overall, our study documents that personal liability deters individuals with high reputational costs and weak monetary incentives from serving as independent directors.
Keywords: Independent directors, Reputation, Accountability, Personal liability, Director incentives
JEL Classification: G30, G34, J33, M41
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