COPORATE GOVERNANCE: BOARD CO-OPTION

Abstract

This dissertation aims to examine the quality of board monitoring using a new measure, board co-option, in regard to how it works as a corporate governance mechanism in relating with other governance attributes and in affecting on different corporate outcomes, especially during the time of financial crisis. The dissertation extends the study of board co-option in three topics. First, the effect of board co-option on firm risk. Firms with more co-opted directors experience significantly lower firm risk during the crisis. The results hold for total risk, idiosyncratic risk, and systematic risk. This corroborates the notion that, managers are inherently risk-averse, particularly so during the crisis. Co-opted directors allow managers to adopt corporate policies that reflect their own risk preferences, resulting in lower firm risk. Second, the impact of co-option on firm value. Using Tobin’s Q and Peters and Taylor’s (1997) Q, the results show that board with more co-opted directors are beneficial to firm value outside the financial crisis. Specifically, a rise in tenure co-opted directors would have improved firm value by 4.85%. During the crisis, however, the effect of co-option is harmful to firm value. Third, the trade-offs between co-option and other governance mechanisms. In particular, we investigate whether board co-option which constitute a weakened mechanism can be substituted by managerial ownership and the external monitoring provided by analyst coverage. The results show that board co-option which constitutes a weakened mechanism can be substituted by managerial ownership. In addition, the efficient board monitoring and the trade-off effects become less necessary in the highly regulated firms.