Board Diversity and Financial Fragility: Evidence from European Banks

Posted: 18 Mar 2015

See all articles by Hisham Farag

Hisham Farag

University of Birmingham - Birmingham Business School

Chris Mallin

Norwich Business School, University of East Anglia; University of Birmingham - Birmingham Business School

Date Written: March 16, 2015

Abstract

In the wake of the recent crisis in European banks, we investigate the influence of board diversity on both financial fragility and performance in European listed banks. We believe that different governance mechanisms may influence female representation in Europe. Moreover, we believe that controlling for bank and time heterogeneity may lead to more robust results. Using data for 99 European banks from 17 countries over the period 2004-2012, we employ the system GMM estimator of dynamic panel data. We find that appointing additional female directors after a critical mass of 23.6% female directors has a negative and significant influence on banks’ vulnerability to financial crisis for banks with unitary boards. Moreover, we find that the diversity-financial fragility relationship is also non-linear and that beyond a critical mass of 18.2% and 23.2% female directors, appointing additional female directors to the supervisory and management boards respectively may decrease financial fragility for European banks with dual boards. Furthermore, we find that high risk and more financially fragile banks are less likely to appoint female directors due to the perception that females are more risk averse and would tend not to condone more risky decisions. Our empirical results provide support for the recent calls for more board diversity by various governments and the EU. The relationship between bank risk and board diversity may potentially have important implications for stability and increased confidence in the banking sector.

Keywords: Board Diversity, Corporate Governance, Financial Fragility, Banks, Financial Institutions, Financial Performance

Suggested Citation

Farag, Hisham and Mallin, Christine, Board Diversity and Financial Fragility: Evidence from European Banks (March 16, 2015). Available at SSRN: https://ssrn.com/abstract=2579377

Hisham Farag (Contact Author)

University of Birmingham - Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

Christine Mallin

Norwich Business School, University of East Anglia ( email )

Norwich Research Park
Norwich, NR4 7TJ
United Kingdom

University of Birmingham - Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

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