Does personal liability deter individuals from serving as independent directors?

This study examines whether personal liability for corporate malfeasance deters individuals from serving as independent directors. After the introduction of personal liability in India, we find that individuals are deterred from serving on corporate boards. We find stronger deterrence among firms wi...

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Bibliographic Details
Published in:Journal of financial economics 2021-05, Vol.140 (2), p.621-643
Main Authors: Naaraayanan, S. Lakshmi, Nielsen, Kasper Meisner
Format: Article
Language:English
Subjects:
Accountability
Business schools
Conferences and conventions
Corporate governance
Deterrence
Director incentives
Directors
Emerging markets
Independent directors
Liability
Liability (Law)
Litigation
Personal liability
Reputation
State court decisions
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Summary:This study examines whether personal liability for corporate malfeasance deters individuals from serving as independent directors. After the introduction of personal liability in India, we find that individuals are deterred from serving on corporate boards. We find stronger deterrence among firms with greater litigation and regulatory risk, higher monitoring costs, and weak monetary incentives. Expert directors are more likely to exit, resulting in 1.16% lower firm value. We further evaluate whether contemporaneous corporate governance reforms and market developments contribute to this deterrence. Overall, our results suggest that personal liability deters individuals with high reputational costs from serving as independent directors.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2021.01.003