Co-opted boards and voluntary disclosure

This study examines whether directors appointed after a Chief Executive Officer (CEO) assumed office (“co-opted” directors) affect corporate voluntary disclosure. I find evidence that firms issue management earnings forecasts less frequently when directors are co-opted. These results hold even when these directors are considered independent by regulatory definitions. Cross-sectional tests indicate that my results are stronger when firms disclose bad news, provide higher pay to co-opted directors, CEOs have greater ability to withhold disclosure, and co-opt directors early in the CEO’s tenure. I use NASDAQ/NYSE listing requirements as an exogenous shock to board co-option and find that director co-option has a causal link to less voluntary disclosure. I further show that the effect was robust to the effect of CEOs’ disclosure preferences and experience inside the firm. This study suggests that boards that appear independent using the conventional measures may fail to elicit adequate voluntary disclosure to monitor managers.