RESEARCH ARTICLE
Does a co-opted director affect a firm's financial distress risk?
Aitzaz Ahsan Alias Sarang,
Asad Ali Rind,
Riadh Manita, Asif Saeed,
Corresponding Author
Aitzaz Ahsan Alias Sarang
Department of Business Administration, Iqra University, Karachi, Pakistan
Correspondence
Aitzaz Ahsan Alias Sarang, Department of Business Administration, Iqra University, Karachi, 75300, Pakistan.
Email: [email protected]
Search for more papers by this authorAsad Ali Rind
Department of Business Administration, Iqra University, Karachi, Pakistan
South Champagne Business School, Y Schools, Troyes, France
INTRARE, Université de Reims Champagne Ardenne, Reims France & Department of Business Administration, Iqra University, Karachi, Pakistan
Search for more papers by this authorAsif Saeed
De Vinci Higher Education, De Vinci Research Center, Paris, France
Search for more papers by this authorAitzaz Ahsan Alias Sarang,
Asad Ali Rind,
Riadh Manita, Asif Saeed,
Corresponding Author
Aitzaz Ahsan Alias Sarang
Department of Business Administration, Iqra University, Karachi, Pakistan
Correspondence
Aitzaz Ahsan Alias Sarang, Department of Business Administration, Iqra University, Karachi, 75300, Pakistan.
Email: [email protected]
Search for more papers by this authorAsad Ali Rind
Department of Business Administration, Iqra University, Karachi, Pakistan
South Champagne Business School, Y Schools, Troyes, France
INTRARE, Université de Reims Champagne Ardenne, Reims France & Department of Business Administration, Iqra University, Karachi, Pakistan
Search for more papers by this authorAsif Saeed
De Vinci Higher Education, De Vinci Research Center, Paris, France
Search for more papers by this authorAbstract
This study examines the relationship between co-opted directors (CODIR), measured as the fraction of directors appointed after the Chief Executive Officer (CEO) assumes office to board size, and firms' financial distress risk (FFDR). Understanding the relationship between CODIR and FFDR is imperative due to the significant impact of high risk-taking on financial crises and the heightened expectations placed on board members for risk oversight. Despite growing research on corporate governance and FFDR, little attention has been paid to the role of CODIRs, presenting a significant gap in the literature. Using a US sample from 1996 to 2019, covering 13,486 firm-year observations, we document that CODIR reduces FFDR, supporting the hypothesis that co-opted directors have a lower financial distress risk-taking propensity than their non-co-opted counterparts. We also find that a critical mass of at least three CODIRs and independent CODIRs reduces FFDR. Our results also document that CEO power in the form of CEO duality and CEO tenure, external monitoring in the form of the number of analysts following the firm, competition, and takeover susceptibility do not drive our main conclusions for co-option and FFDR. Finally, the results show that CODIR reduces FFDR through liquidity channels. The findings remain robust to various definitions of co-option and distress risk, and are consistent in both difference-in-differences analysis and propensity score matching.
CONFLICT OF INTEREST STATEMENT
The authors have no conflict of interest.
Open Research
DATA AVAILABILITY STATEMENT
The data that support the findings of this study are available on request from the corresponding author. The data are not publicly available due to privacy or ethical restrictions.
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