Financial Expertise of Directors

51 Pages Posted: 14 Jul 2006 Last revised: 23 Jul 2010

See all articles by A. Burak Guner

A. Burak Guner

Citadel

Ulrike Malmendier

University of California, Berkeley - Department of Economics; University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Geoffrey A. Tate

University of Maryland - Robert H. Smith School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2006

Abstract

The composition and functioning of corporate boards is at the core of the academic and policy debate on optimal corporate governance. But does board composition matter for corporate decisions? In this paper, we analyze the role of financial experts on boards. In a novel panel data set on board composition, we find that financial experts significantly affect corporate decisions, though not necessarily in the interest of shareholders. First, when commercial bankers join boards, external funding increases and investment-cash flow sensitivity diminishes. But, the increased financing affects mostly firms with good credit and poor investment opportunities. Second, investment bankers on the board are associated with larger bond issues, but also worse acquisitions. Third, we find little evidence that financial expertise matters for compensation policy or for experts without affiliation to a financial institution. The results suggest a tradeoff between outside incentives (e.g. bank profits) and the incentive to maximize firm value. Requiring financial expertise on boards, as mandated by regulatory proposals, may not benefit shareholders if conflicting interests are neglected.

Suggested Citation

Guner, A. Burak and Malmendier, Ulrike and Tate, Geoffrey A., Financial Expertise of Directors (January 2006). NBER Working Paper No. w11914, Available at SSRN: https://ssrn.com/abstract=875673

A. Burak Guner

Citadel ( email )

Chicago, IL 60603
United States

Ulrike Malmendier (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
(510) 642-8724 (Phone)
(510) 642-6615 (Fax)

HOME PAGE: http://www.econ.berkeley.edu/~ulrike/

University of California, Berkeley - Haas School of Business ( email )

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Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Institute for the Study of Labor (IZA)

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Bonn, D-53072
Germany

HOME PAGE: http://www.iza.org/en/webcontent/personnel/photos/index_html?key=918

Geoffrey A. Tate

University of Maryland - Robert H. Smith School of Business ( email )

MD
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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