Working Paper: NBER ID: w11914
Authors: A. Burak Guner; Ulrike Malmendier; Geoffrey Tate
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.
Keywords: corporate governance; financial expertise; investment decisions; board composition
JEL Codes: D82; G21; G24; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Presence of commercial bankers on boards (G21) | Investment-cash flow sensitivity (G31) |
| Presence of investment bankers on boards (G34) | Cumulative abnormal returns around merger announcements (G34) |
| Presence of investment bankers on boards (G34) | Underperformance in the years following acquisitions (G34) |
| Presence of non-conflicted financial experts (G39) | Improvement in firm policies (L10) |
| Presence of non-conflicted financial experts (G39) | Impact on executive compensation (M12) |