Board Accountability and Risk Taking in Banking – Evidence from a Quasi-Experiment

Abstract

In this paper, a law reform is evaluated that aimed at improving the corporate governance of German savings banks by tightening accountability and legal liability of outside directors. The causal effect of this reform on bank risk is identified by difference-in-differences and triple differences strategies. The estimation results show that savings banks subject to the reform increased capital and liquidity ratios. Hence, they have become less vulnerable to unexpected losses and liquidity shocks. This indicates that the low occurrence of outside director litigation reflects incentive effects of current liability regimes.

Keywords: Corporate governance, outside directors, legal liability, bank risk

JEL Classification: G21, G38, K20