Management Insulation and Bank Failures
37 Pages Posted: 3 Nov 2012 Last revised: 16 Apr 2021
Date Written: April 10, 2021
How does management insulation from shareholder pressure influence banks’ resilience to crises? To address this question, we develop a measure of management insulation based on legal provisions. Unlike the existing alternatives, our measure considers the interactions between different provisions. We use this measure to study the relationship between management insulation and bank failure during the 2007-09 financial crisis. We find that banks in which managers were more insulated from shareholders in 2003 were less likely to be both bailed out in 2008/09 and targeted by activist shareholders. By contrast, alternative measures of management insulation fail to predict both bailouts and shareholder activism.
Keywords: Corporate Governance, Bank Bailouts
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