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Financial Expertise of the Board, Risk Taking, and Performance: Evidence from Bank Holding Companies

Published online by Cambridge University Press:  13 May 2014

Bernadette A. Minton ,
Jérôme P. Taillard  and
Rohan Williamson
Bernadette A. Minton
Affiliation:
[email protected], Fisher College of Business, Ohio State University, 2100 Neil Ave, Columbus, OH 43210
Jérôme P. Taillard
Affiliation:
[email protected], Carroll School of Management, Boston College, 140 Commonwealth Ave, Chestnut Hill, MA 02467
Rohan Williamson
Affiliation:
[email protected], McDonough School of Business, Georgetown University, 3700 O St NW, Washington, DC 20057
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Abstract

Financial expertise among independent directors of U.S. banks is positively associated with balance-sheet and market-based measures of risk in the run-up to the 2007–2008 financial crisis. While financial expertise is weakly associated with better performance before the crisis, it is strongly related to lower performance during the crisis. Overall, the results are consistent with independent directors with financial expertise supporting increased risk taking prior to the crisis. Despite being consistent with shareholder value maximization ex ante, these actions become detrimental during the crisis. These results are not driven by powerful chief executive officers who select independent financial experts to rubber stamp strategies that satisfy their risk appetite.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 2 , April 2014 , pp. 351 - 380
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2014 

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