Co-opted boards, corporate risk-taking behavior and social capital

Abstract

This paper empirically investigates the effect of co-opted boards on corporate risk-taking behavior and the moderating effect of social capital on the relation. We find a positive relation between board co-option and equity volatility. Endogeneity concerns are addressed using difference-in-difference (DID) methodology. Evidence also demonstrates that social capital acts as a moderator alleviating managers’ risk-taking incentives in the presence of a weakened corporate governance, thus offsetting negative corporate outcomes. Alternative measures of social capital are employed to validate the robustness of estimations.