Independent directors’ reputation incentives and corporate risk-taking

ABSTRACT Corporate board oversight of risk assessment is vital to ensuring the integrity of financial reports. This study examines the relationship between independent directors’ reputation incentives and corporate risk-taking by investigating whether strengthening these incentives can reduce risk among companies listed on the Australian Securities Exchange (ASX). Using a balanced panel sample of the top 500 ASX-listed firms from 2009 to 2021, the findings indicate that stronger reputation incentives among independent directors are associated with lower corporate risk-taking, whereas a higher proportion of independent directors with weaker reputation incentives leads to increased risk. These results suggest that independent directors with strong reputational motivations play a critical role in mitigating corporate risk through enhanced oversight. The findings remain robust after addressing potential endogeneity through various methodological approaches. This study underscores the significance of reputable independent directors in fostering sound risk management practices and offers valuable insights for policymakers, practitioners, and future research.