Problem Directors and Corporate Risk‐Taking

Bhuiyan, Borhan; Liu, Jia; Alam, Ashraful

Abstract

This study investigates the impact of a ‘problem director’ on the risk‐taking propensity of a firm and its consequences for firm value. Analysing a sample of US companies, we find that corporate risk‐taking propensity increases when a firm appoints a problem director. Our results are of economic significance, indicating that a one standard deviation increase in problem director's score leads to a 2.33% to 4.17% increase in corporate risk‐taking. Mediation analysis reveals that a problem director increases firm risk‐taking through reducing financial reporting quality. Further, a firm's risk‐taking increases when a new problem director joins the board, and the damaging effect persists even after the problem director has left. Moreover, if a chief executive officer (CEO) is a problem director, s/he displays a greater predisposition for risk‐taking. Moreover, when a problem director also sits on a board led by a problem CEO, we determine that the former will have an even greater propensity to take risks. Further analysis determines that the presence of problem directors damages long‐term firm value in the aftermath of risk‐taking behaviour. Overall, this study provides fresh evidence revealing a web of connections between a problem director, ineffective corporate governance and a decline in firm value.

Citation

Bhuiyan, B., Liu, J., & Alam, A. (in press). Problem Directors and Corporate Risk‐Taking. British Journal of Management, https://doi.org/10.1111/1467-8551.12770

• Journal Article Type: Article
• Acceptance Date: Oct 2, 2023
• Online Publication Date: Oct 20, 2023
• Deposit Date: Oct 13, 2023
• Publicly Available Date: Oct 21, 2025
• Journal: British Journal of Management
• Print ISSN: 1467-8551
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1111/1467-8551.12770