Bankers on the Board and CEO Incentives

Bankers on the Board and CEO Turnover

“…Having bankers on the board brings a natural conflict of interest despite the financial expertise they may bring to the table. While Kang and Kim (2017) show that the presence of CBDs makes the explicit incentive of CEO pay less sensitive to risk, our study shows that the presence of CBDs makes the implicit incentive of CEO turnover more sensitive to both performance and risk. While the portion of US firms with CBDs is diminishing, it is still high in other countries with bank-based economic development (Goldsmith, 1959;Allen and Gale, 2000;La Porta et al, 2002;Demirg€ uc ß-Kunt and Levine, 2004), as in Europe and Asia (Kroszner and Strahan, 2001;Levine, 2002).…”

“…Bankers are different from entrepreneurs in perceiving and managing risks (Sarasvathy et al, 1998). They focus more on controlling risks and try to avoid situations where they may face higher levels of risk (Mitchell, 2015;Kang and Kim, 2017;Kang et al, 2019). This is because an increase in a bank's tail risk imposes more hardship and costs on its operation (Stulz, 2015;Srivastav et al, 2017).…”

“…Through career training in commercial banking, CBDs become experts in risk management (Weinstein and Yafeh, 1998;John et al, 2008) and in processing financial accounting information (Fama and Jensen, 1983;Weisbach, 1988). While CBDs have a fiduciary duty to protect the shareholders' interests that are by definition more risk-tolerant than debt holders', they (especially those from lending banks) have an equally important fiduciary duty to their employing banks to minimize firm risk (Jensen and Meckling, 1976;Hilscher and S ßis ßli-Ciamarra, 2013;Erkens et al, 2014;Kang and Kim, 2017). Kang and Kim (2017) find that CBDs influence a CEO's compensation structure to be less sensitive to firm risk.…”

Do bankers on the board reduce crash risk?

“…The directors’ monitoring capacities vary with their expertise and career backgrounds (Güner, Malmendier, & Tate, ). Commercial banker‐directors (CBDs) have significant financial expertise, but they also bring substantial conflicts of interest between shareholders and debtholders, especially when their employing banks have a lending relationship with the firm (Black & Scholes, ; Booth & Deli, ; Güner et al, ; Hilscher & Şişli‐Ciamarra, ; Jensen & Meckling, ; Kang & Kim, ; Kaplan & Minton, ; Kim & Sorensen, ; Kroszner & Strahan, ; Mitchell & Walker, ; Myers, ; Sisli‐Ciamarra, ).…”

“…Given that stock price crashes reduce the market value of firms, crash risk is a nontrivial concern for the director's reputation. The concern would be especially severe for CBDs because they have clear economic incentives from their employing banks to reduce the downside risk of firms (Kang & Kim, ; Kroszner & Strahan, ). Thus, our primary research question in this paper is whether CBDs are effective in reducing the stock price crash risk of firms.…”