Bank Representatives on the Board of Directors and their Influence on Risk and Managerial Compensation

44 Pages Posted: 6 Jan 2020 Last revised: 21 Jan 2020

See all articles by Sandra Kronenberger

Sandra Kronenberger

Johannes Gutenberg University Mainz - Gutenberg School of Economics and Management

Katrin Weiskirchner-Merten

Vienna University of Economics and Business - Department of Finance, Accounting & Statistics

Date Written: December 16, 2019

Abstract

This paper examines the role of bank representatives on the firm’s board of directors and their influence on risk and managerial compensation. After the firm has taken on debt for a big-scale lump-sum investment project, the bank representatives are inclined to lower the project risk, which is contrary to the shareholder’s interests of taking on more risk. However, higher risk increases the expected managerial compensation. We use a one period discrete model to show that the bank representatives on the board can become beneficial from the shareholders’ perspective. This benefit occurs because the bank representatives on the board act as a commitment device for the board to implement less risk, which results in lower expected managerial compensation. The model predicts that shareholders benefit from bank representatives on the board of directors when they expect low project profitability.

Keywords: board of directors, bank representative, managerial compensation, risk

JEL Classification: D82, G32, G34, M40

Suggested Citation

Kronenberger, Sandra and Weiskirchner-Merten, Katrin, Bank Representatives on the Board of Directors and their Influence on Risk and Managerial Compensation (December 16, 2019). Available at SSRN: https://ssrn.com/abstract=3504573 or http://dx.doi.org/10.2139/ssrn.3504573

Sandra Kronenberger

Johannes Gutenberg University Mainz - Gutenberg School of Economics and Management ( email )

Mainz
Germany

Katrin Weiskirchner-Merten (Contact Author)

Vienna University of Economics and Business - Department of Finance, Accounting & Statistics ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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