Financial Expertise of Directors
A. Burak Guner
University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)
Geoffrey A. Tate
University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School
May 1, 2008
Journal of Financial Economics (JFE), Vol. 88, No. 2, pp. 323-354, May 2008
We analyze how directors with financial expertise affect corporate decisions. Using a novel panel data set, we find that financial experts exert significant influence, though not necessarily in the interest of shareholders. When commercial bankers join boards, external funding increases and investment-cash flow sensitivity decreases. However, the increased financing flows to firms with good credit but poor investment opportunities. Similarly, investment bankers on boards are associated with larger bond issues but worse acquisitions. We find little evidence that financial experts affect compensation policy. The results suggest that increasing financial expertise on boards may not benefit shareholders if conflicting interests (e.g., bank profits) are neglected.
Keywords: corporate governance, bankers, boards of directors
JEL Classification: G24, G38Accepted Paper Series
Date posted: August 19, 2008
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