Do Independence and Financial Expertise of the Board Matter for Risk Taking and Performance?
59 Pages Posted: 18 Mar 2011
Date Written: February 15, 2011
During the recent financial crisis, financial expertise among independent directors of financial institutions is negatively related to changes in both Tobin’s Q and cumulative stock returns. Furthermore, financial expertise is positively associated with risk-taking levels in the run-up to the crisis using both balance-sheet and market-based measures of risk. These results are not driven by powerful CEOs who select independent experts to rubber stamp strategies that satisfy their risk appetite. They are however consistent with directors with financial expertise recognizing the residual nature of shareholders’ claim on a bank’s highly leveraged balance sheet that is guaranteed by the government.
Keywords: Governance, Risk Taking, Board Composition, Expertise, Risk Management Committee
JEL Classification: G20, G21, G24, G32
Suggested Citation: Suggested Citation