It's Not So Bad: Director Bankruptcy Experience and Corporate Risk-Taking

It's Not So Bad: Director Bankruptcy Experience and Corporate Risk-Taking

Todd Gormley, Radhakrishnan Gopalan, Ankit Kalda

Series number :

Serial Number: 
648/2020

Date posted :

January 20 2020

Last revised :

October 19 2020
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Keywords

  • directors • 
  • Bankruptcy • 
  • risk • 
  • experience • 
  • beliefs

We show that firms take more (but not necessarily excessive) risks when one of their directors experiences a corporate bankruptcy at another firm where they concurrently serve as a director.

This increase in risk-taking is concentrated among firms where the director experiences a shorter, less-costly bankruptcy and where the affected director likely exerts greater influence and serves in an advisory role. The findings show that individual directors, not just CEOs, can influence a wide range of corporate outcomes. The findings also suggest that individuals actively learn from their experiences and that directors tend to lower their estimate of distress costs after participating in a bankruptcy firsthand.

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Published in

Published in: 
Publication Title: 
Journal of Financial Economics (JFE), Forthcoming

Authors

Real name:
Radhakrishnan Gopalan
Real name:
Ankit Kalda