We investigate the relation between co-opted boards and the risk of a stock price crash risk. The co-opted directors appointed after the CEO assumes office tend to have allegiance to the CEO, attenuating board monitoring roles. Using a large sample of U.S. firms for the period 1996-2014, we find robust evidence that board co-option is positively associated with future stock price crash risk, suggesting that weak monitoring induced by co-opted directors facilitates managerial bad news hoarding activities. Our main finding holds for various robustness tests, including an analysis based on propensity score methods (PSM), dynamic panel generalized method of moments (GMM), and diagnostic test of coefficient stability. Further analyses show that the impact of co-option on the risk of a stock price crash is more pronounced when CEOs are more concerned about their careers. This indicates that the CEO who has greater preferences for bad news hoarding is more likely to exploit opportunities relating to attenuated board monitoring to promote their personal benefits. Overall, our findings suggest that board co-option appears to decrease the effectiveness of board monitoring, and that the role of board monitoring is particularly important when the CEO has stronger incentive to withhold negative information. 

Keywords: Co-option, Board Friendliness, Board Monitoring, Independence, Stock Price Crash Risk
JEL classification: G34, G32​