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 :

August 06 2020
SSRN Share

Keywords

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

We document that firms take more risks, as measured using financial leverage, volatility, distress risk, and acquisition activity, when one of their directors experiences a corporate bankruptcy at another firm where they concurrently serve as a director.

This increase is concentrated among directors experiencing shorter, less-costly bankruptcies; among interlocked directors whose primary role is advising; and in instances when the interlocked director may exert greater influence on the board. These findings suggest that directors’ personal experiences influence a wide range of corporate policy choices, and that, on average, directors lower their estimate of distress costs after experiencing a bankruptcy first-hand.

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Authors

Real name:
Radhakrishnan Gopalan
Real name:
Ankit Kalda