Co-opted directors, gender diversity, and crash risk: evidence from China

Abstract

This study examines how the composition of the board of directors at Chinese firms affects crash risk. The results indicate that co-opted directors (i.e., directors appointed after the CEO assumed office) have a positive and significant effect on crash risk; the positive relation between board directors and crash risk is primarily driven by co-opted male directors, implying a gender difference on crash risk. Non-co-opted independent directors mitigate crash risk, but the negative relation between gender and crash risk is much stronger for female directors than for male directors. The results indicate that co-option/non-co-opted independence along with gender diversity on the board plays an important role in shaping crash risk behaviors. The director-crash risk linkage disappears at state-owned enterprises, suggesting that ownership structure affects board behaviors and board members play the role of rubber-stamp. Finally, the relation between gender and crash risk is more pronounced at crash-risk prone firms with high earnings management and high financial leverage.

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Notes

  1. 1.

    Previous studies also show that engagement in corporate social responsibility (CSR) (Kim et al. 2014), religion (Callen and Fang 2015), and directors’ and officer’s liability insurance and social trust (Li et al. 2017) affect crash risk.

  2. 2.

    Other nonfinancial reporting activities, such as having more dedicated institutional investors (An and Zhang 2013), institutional investor stability (Callen and Fang 2013), engaging in corporate social responsibility (CSR) activities (Kim et al. 2014), the religiosity factor (Callen and Fang 2015), and directors’ and officers’ liability insurance and social trust (Li et al. 2017) all have a significant effect on crash risk.

  3. 3.

    We use the Stata package ‘ivreg2h’ (Baum and Schaffer 2012) to estimate these models.

  4. 4.

    We further examine whether R&D serves as a mediator between the co-opted board and crash risk. Following the mediation analysis of Baron and Kenny (1986), we regress the crash risk on both CO-OPTION and R&D. The coefficient of R&D is insignificant, implying that R&D is not a mediator to cause crash risk. The result of the mediator analysis is reported in Appendix A5.

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Acknowledgements

We are grateful to the constructive comments and recommendations of the Editor, Cheng-Few Lee, and an anonymous reviewer. We also appreciate participants at 2019 27th Annual Conference on Pacific Basin Finance, Economics, Accounting, and Management (PBFEAM) at Taiwan University. This research was partly supported by the Ministry of Science and Technology (MOST) of Taiwan (Grant Nos. 107-2410-H-029-050 and MOST 107-2410-H-032-015).

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Appendix

Appendix

See Tables 10, 11, 12, 13 and 14.

Table 10 Definition of variables
Table 11 Robustness check: controlling for firm-fixed effect and cluster effects
Table 12 Robustness check for controlling Outliers
Table 13 Robustness check for a longer forecast window (two-year window)
Table 14 The mediation analysis of R&D between co-option and crash risk

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Kao, E.H., Huang, HC., Fung, HG. et al. Co-opted directors, gender diversity, and crash risk: evidence from China. Rev Quant Finan Acc 55, 461–500 (2020). https://doi.org/10.1007/s11156-019-00850-3

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Keywords

  • Co-option
  • Crash risk
  • Gender diversity
  • Independent director
  • State-owned enterprises

JEL Classification

  • G3
  • G32
  • G34