Financially Linked Independent Directors and Bankruptcy Reemergence: The Role of Director Effort

Abstract

This study examines if the effort of financially linked independent (FLI) directors enable firms to reemerge from bankruptcy, a major organizational crisis. Using a sample of 307 bankrupt U.S. firms with instrumental variables regression methodology, I find that the efforts of these directors are critical for firm reemergence. FLI directors’ efforts increase the likelihood of reemergence as well as improve access to financial resources. In contrast, I do not find any evidence that non-FLI directors’ efforts are associated with reemergence. I also find that resourceful but uninvolved directors are not helpful for firms trying to navigate their way out of bankruptcy. My study highlights (a) the changing nature of roles played by directors in various lifecycle stages, (b) the greater importance of resource provisioning over monitoring during reemergence, and (c) that efforts of FLI directors, and not others director categories, matter for reemergence. Overall, my study extends research that suggests directors’ motivation may cause differential firm outcomes and provides evidence that directors do not always put in their best effort on behalf of their firms. This, I suggest, has profound implications for corporate governance research and practice.

The information content of stock prices after bankruptcy

“…Campello et al (2018) find that firms with a large percentage of their workforce in unions experience longer proceedings in bankruptcy court, with more bankruptcy emergences and subsequent refillings. Finally, Arora (2018) finds that the effort of financially linked independent directors increases the likelihood of emergence as well as improved access to financial resources.…”

Female Representation on Corporate Boards in Europe: The Interplay of Organizational Social Consciousness and Institutions

“…We control for board size as prior research has shown it to be critical to firm performance, including social performance and external legitimacy (Arora, 2018). We similarly control for the proportion of independent directors.…”

When do firms benefit from affiliated outside directors? Evidence from Korea

“…When a firm faces a takeover threat, AODs are more likely than IODs to stay with the firm (Daily & Dalton, 1994) and side with incumbent firm executives, thereby deriving higher premium offers (Bange & Mazzeo, 2004;Schmidt, 2015). 1 Similarly, when creditors threaten a firm with bankruptcy, an AOD can offer firm-specific bankruptcy advice and capitalize on his connections at banks and financial government agencies to negotiate favorable terms, thereby aiding the firm's emergence from bankruptcy (Arora, 2016). 2 When external threats create high information asymmetry between insiders and outsiders (Hoshi, Kashyap, & Scharfstein, 1990), firm executives are more likely to trust AODs and share sensitive, relevant, firm information with AODs-especially those with social ties to them-compared to their IODs (Adams & Ferreira, 2007).…”

“…In firms facing takeovers, AODs sided with firm managers to obtain higher premium offers (Bange & Mazzeo, 2004;Schmidt, 2015). In distressed firms, AODs negotiate with banks to obtain favorable terms (Arora, 2016).…”

“…Among such targeted firms, those firms with AODs receive higher premiums than those without them, suggesting effective AOD advice (Schmidt, 2015). Also, firms with AODs are more likely than other firms to re-emerge from bankruptcy, suggesting effective AOD advice or AOD liaising with government/banks (Arora, 2016). In firms under heavy regulations or seeking government contracts, politically-connected directors can liaise with government agencies (Agrawal & Knoeber, 2001;Goldman, Rocholl, & So, 2013;Joh, Chiu, & Cho, 2017;Pfeffer, 1972;Siegel, 2007).…”