Director Co-option and the Cash Conversion Cycl

Abstract

This study examines whether co-opted directors degrade or improve working capital efficiency. We find strong evidence that firms with more co-opted boards exhibit lower cash conversion cycles and so are more efficient at managing working capital. After controlling for other factors, board co-option reduces the length of the cash conversion cycle by about -1.2%, whereas the co-option of independent directors reduces the cycle by nearly -2.0%. These results persist even after addressing endogeneity and are robust to alternate measures of the cash conversion cycle. In general, our study lends credence to the argument that co-option reduces managerial myopic behavior as it reduces the likelihood of dismissal and so motivates managers to make better investment decisions that may improve firm proficiency.