Executive board composition and bank risk taking

Abstract

Little is known about how socioeconomic characteristics of executive teams affect corporate governance in banking. Exploiting a unique dataset, we show how age, gender, and education composition of executive teams affect risk taking of financial institutions. First, we establish that age, gender, and education jointly affect the variability of bank performance. Second, we use difference-in-difference estimations that focus exclusively on mandatory executive retirements and find that younger executive teams increase risk taking, as do board changes that result in a Non-technical summaryThe socio-economical composition of a company's executive board is highly relevant for economic and social policy. For example, gender quotas are often advocated to improve career outcomes for females and 'break the glass ceiling'. Similarly, educational requirements for bank boards have been proposed in the past as a means to improve corporate governance.However, little is known about the effects on firm outcomes of having more female, more educated or older board members. Do female board members really force a less risky conduct of business? Do educated board members increase or reduce bank risk-taking? And does the age of executive board members matter?We construct a unique dataset for the entire population of German bank executive teams for the period 1994 -2010. Exploiting this dataset, we examine how the age, gender, and education composition of banks' executive boards affect bank risk taking. In our first test, we empirically establish that age, gender, and education affect the observed volatility of bank profits. In a second step, we compare banks which experienced changes in board structure to similar banks without such a change. Generally, changes in board structure could be symptoms of underlying trends in a bank's business model. For example, shareholders might appoint directors with similar views regarding the bank's optimal strategy. Such underlying trends would confound our analysis, as we would attribute the changes in risk taking to the new board structure. We circumvent this problem by only considering board changes due to the retirement of a board member. This strategy allows us to capture the impact of a younger, more female or more experienced board.We obtain the following key results. First, we show that younger executive teams increase risk-taking. Second, board changes that result in a higher proportion of female executives also lead to a more risky conduct of business. Third, if board changes increase the representation of executives holding Ph.D. degrees, risk taking declines. This has important policy implications: while quotas regarding the age, gender and education of an executive directly affect the representation of different groups on executive boards, they have a knock-on effect on corporate outcomes.

The Relationship Between Board of Directors’ Characteristics and Bank Risk-Taking: Evidence from Egyptian Banking Sector

“…The findings are consistent with the studies that found a negative relation between gender diversity and risk-taking predicting that board females are risk averse [11,47]. Board members with a PhD degree has positive insignificant relation with the three measures of risks which is a contrast to the finding of [9], who find that better educated board members decrease portfolio risk, and with [20], who found higher education increase the bank risk-taking.…”

“…", the study found that Board member with a PhD has a positive insignificant relation with the three measures of risks, accordingly, the results don't support hypothesis 5. However, This is in contrast with the finding of [9], who find that better educated members in the board of directors decreases portfolio risk, suggesting that they apply better risk management techniques, and with [20], who show that higher education increase the bank risk taking. It seems that it is not the qualification only that affect the bank risk taking but also the way the members leverage their knowledge and skills with their educational qualifications in enhancing the bank efficiency.…”

“…[20], found that higher education increases participation in stock market investments and accordingly increases the bank risk -taking. On the contrary [9], in his research to investigate the relation between executive directors holding PhD degrees find that better educated members in the board of directors' decreases portfolio risk, arguing that they apply better risk management techniques. Accordingly, our hypothesis is constructed as follows; H5: Board member with a PhD qualification has positive effect a bank's risk-taking.…”

“…For example, [2], find a positive relationship while, [25], find an inverse relation between gender diversity and risk-taking predicting that board females are risk averse. However, the studies concerning the relationship between board female and bank risk-taking are mixed, for example, [9], record a positive relationship, suggesting that female directors in banks have the tendency to take more risk than male directors and having females on the board not necessarily lead to more risk-averse decision-making. On the contrary, some other studies such as [11,47], find a negative correlation between gender diversity and risk-taking predicting that board females are risk averse.…”

Why is it a man’s world, after all? Women on bank boards in India

“…First, to the best of our knowledge, this is one of the earliest studies to systematically investigate the issue of gender diversity on bank performance for a leading emerging economy. Most studies of this genre are either cross-country in nature (Andres and Vallelado, 2008;Garcia-Meca et al, 2015) or, even if they are within-country studies, are focused primarily on developed countries (de Cabo et al, 2012;Berger et al, 2013;Del Prete and Stefani, 2013;Pathan and Faff, 2013) or economies such as China (Liang et al, 2013) and Korea (Choi and Hasan, 2005). Little, if any, systematic empirical evidence is available for India, and this is one of the major concerns of the paper.…”