Does Personal Liability Deter Individuals from Serving as Independent Directors?

50 Pages Posted: 17 Oct 2019 Last revised: 18 Dec 2020

See all articles by S Lakshmi Naaraayanan

S Lakshmi Naaraayanan

London Business School

Kasper Meisner Nielsen

Copenhagen Business School - Department of Finance

Date Written: December 17, 2020

Abstract

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

Suggested Citation

Naaraayanan, S Lakshmi and Nielsen, Kasper Meisner, Does Personal Liability Deter Individuals from Serving as Independent Directors? (December 17, 2020). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3466102 or http://dx.doi.org/10.2139/ssrn.3466102

S Lakshmi Naaraayanan (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://www.lakshmin.com

Kasper Meisner Nielsen

Copenhagen Business School - Department of Finance ( email )

A4.17 Solbjerg Plads 3
Copenhagen, Frederiksberg 2000
Denmark

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