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Does personal liability deter individuals from serving as independent directors?

Journal

Journal of Financial Economics

Subject

Finance

Publishing details

Journal of Financial Economics 2021 Vol 140:2 p 621-643

Authors / Editors

Naaraayanan L;Nielsen K M

Biographies

Lakshmi Naaraayanan

Publication Year

2021

Abstract

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.

Keywords

Independent directors; Reputation; Accountability; Personal liability; Director incentives

Available on ECCH

No


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