A large theoretical literature suggests that bankruptcy law penalties can reduce agency problems, yet evidence remains scarce. To provide evidence, I examine whether firms implement independent directors as a substitute when penalties are eliminated. For identification, I exploit that penalties are relevant only for risky firms. Across countries, board independence is negatively related to penalties, but only among risky firms. Comparing board independence of risky and safe firms around bankruptcy reforms in Germany, Italy, and the US confirms the results. Economically, risky firms increase the number of independent directors by 21% relative to safe firms following the elimination of penalties.
SAFE Working Paper No. 488
