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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.
Using a sample of commercial aircraft transactions, the paper decomposes the raw fire sale discount on sales of aircraft by distressed airlines into...