Co-opted Boards, Social Capital, and Risk-taking

Co-opted Boards and Corporate Cash Holdings

“…For instance, Coles et al (2014) demonstrate that co-opted directors lead to low forced CEO turnover rates, high CEO pay, low CEO pay-performance sensitivity, and an increase in investing activities. Huang et al (2021) report a positive association between board co-option and firm risk through the channel of investments. In this section, we examine the specific investment channels of firms led by coopted boards.…”

“…However, when facing financial constraints, rational managers may hold onto cash for precaution against uncertainties and financial distress (Bates et al, 2009). In theory, since CEOs under co-opted boards are more entrenched (Coles et al, 2014) and therefore less risk-averse (Huang et al, 2021), their excessive cash holdings are less likely to be driven by precautionary motives. Furthermore, even though no theory predicts that co-opted boards care more about such precautions, we attempt to empirically rule out the possibility in this section.…”