Does Financial Experience Help Banks during Credit Crises?

Abstract:     
We investigate whether board of directors with financial experience provide U.S. banks with a monitoring advantage or leads them to moral hazard. The recent credit crisis provides a natural experiment in which we test these conjectures. Our results reject the moral hazard hypothesis. Banks with more financial experts serving as outside directors (i) limit their risk exposure before the crisis, (ii) exhibit better stock return performance during the crisis, (iii) earn higher CARs around the collapse of both Bear Stearns and Lehman Brothers, and (iv) receive less bailout aid from the Troubled Assets Relief Program implemented by the U.S. government.

Number of Pages in PDF File: 41

Keywords: Financial expertise, Credit crisis, Bank returns, Moral hazard, Bailouts

JEL Classification: G21, H81, K23

working papers series