Do Independence and Financial Expertise of the Board Matter for Risk Taking and Performance?

46 Pages Posted: 22 Oct 2010 Last revised: 14 Mar 2012

See all articles by Jérôme Taillard

Jérôme Taillard

Babson College

Bernadette A. Minton

Ohio State University (OSU) - Department of Finance

Rohan Williamson

Georgetown University - McDonough School of Business

Date Written: July 1, 2010

Abstract

We examine how risk taking and firm value are related to independence and financial expertise of the board for a large sample of U.S. financial institutions both before and during the financial crisis. During the crisis, financial expertise is negatively related to both changes in Tobin’s Q and cumulative stock returns. The effect is stronger for larger banks. Results on independence and performance during the crisis are mixed. However, independence is associated with a significantly higher probability of getting TARP funds, while financial expertise is not. In the run-up to the crisis, market-based measures of risk are negatively related to the percent of independent directors and positively related to financial expertise. Furthermore, both stock performance prior to the crisis and leverage are positively related to the financial expertise of the board. These associations are again primarily driven by large banks in our sample. Overall, our results are consistent with financial expertise being associated with more risk taking and higher firm value prior to the crisis and lower performance when the crisis hits.

Keywords: Governance, Risk Taking, Board Composition, Expertise, Risk Management Committee

JEL Classification: G20, G21, G24, G32

Suggested Citation

Taillard, Jérôme and Minton, Bernadette A. and Williamson, Rohan G., Do Independence and Financial Expertise of the Board Matter for Risk Taking and Performance? (July 1, 2010). Paris December 2010 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=1695489 or http://dx.doi.org/10.2139/ssrn.1695489

Jérôme Taillard (Contact Author)

Babson College ( email )

Babson Park, MA 02457-0310
United States
781-239-6451 (Phone)

Bernadette A. Minton

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-688-3125 (Phone)
614-292-2359 (Fax)

Rohan G. Williamson

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-2284 (Phone)
202-687-4031 (Fax)

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