Does Personal Liability Deter Individuals from Serving as Independent Directors?

S. Lakshmi Naaraayanan*, Kasper Meisner Nielsen

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

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.
Original languageEnglish
JournalJournal of Financial Economics
Number of pages23
ISSN0304-405X
DOIs
Publication statusPublished - 9 Jan 2021

Bibliographical note

Epub ahead of print. Published online: 9 January 2021.

Keywords

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

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