We study how the risk taking incentives of bank CEOs are related to bank failure during the 2007-2010 financial crisis. Our main result is that, if we measure incentives taking into account the risk taking incentives embedded in the equity held by bank CEOs, stronger risk taking incentives are associated with a higher probability of failure. We also study whether risk taking incentives may be the result of corporate governance failures and find that, on the contrary, bank CEOs have stronger risk taking incentives in banks whose shareholders appear to also have stronger incentives to shift risk to other stakeholders. Finally, we show that risk taking incentives are not clearly associated with particular forms of compensation (such as stock options or termination payments), so that monitoring the use of different compensation vehicles may not be the optimal way to control the risk taking incentives of bank CEOs.
We show that over the last decade, growing public pressure for board gender diversity and awareness of gender equality issues in the U.S. has manifested in “seasoned” female board members accumulating multiple board appointments at a rate faster than seasoned male directors. The larger firms have been the most active in attracting seasoned female directors, at the expense of the smaller firms. This has likely contributed to the smaller firms lagging behind the larger firms in the pursuit of more gender balance. Our evidence is highly consistent with “supply constraints”, as reflected in high costs of recruiting first-time female directors, which the larger firms manage to avoid and the smaller firms find too costly to incur. Gender quota mandates are likely to expose the smaller firms even more to these costs; however, the absence of mandates may also not be optimal. Given growing public pressure, it may be necessary to mandate that larger firms maintain the ratio of first-time to seasoned female appointments above some level.
"Inventors in the boardroom: Does it matter to have directors with innovation experience on your board?" (co-authored with Mohamed Badawy and Mohamed Ghaly)
This paper examines how independent directors with patenting expertise affect firm innovation. We find that firms with inventors on their boards spend more on R&D, generate more patents, and their patents receive a higher number of citations and have greater economic value. They are also more likely to engage in radical and explorative innovations across a wider array of technology classes. These effects are stronger when directors are active and influential inventors. The contribution of inventor directors to firm innovation is more pronounced when CEOs lack innovation experience but remains substantial even in the presence of inventor-CEOs.
This paper studies the changes in the innovation output of the firm associated with the presence of independent female inventor-directors on board. We find that the presence of female directors with innovation (patenting) experience is positively correlated to the overall patenting performance of the firm’s female inventors and affects the firm’s hiring policy. Boards with at least one female director with patenting expertise employ more female inventors, who are more productive, and have a greater contribution to firm innovation. The introduction of a new female inventor-director also increases the productivity of incumbent female inventors in the firm as measured by the number of patents, citations, value and importance of the patents female inventors file. Further results show that the innovation productivity gender gap between male and female inventors shrinks with the presence of female inventor-directors. These effects are more pronounced when the female director is a star inventor.
“Independent or co-opted? Corporate directors with ties to the nonprofit sector”
Independent directors who also sit at boards of non-profit organizations (NPOs) may contribute valuable knowledge or personal traits to their firms. However, they may also be prone to be co-opted by the CEO with promises of donations to the NPO of their interest. This paper studies whether the links with NPOs affect performance of independent directors by analyzing how the presence of NPO-linked directors affect firm value, CEO pay and earnings management. To identify the causal effect of NPO-linked directors I use the retirement of independent directors as a source of exogenous variation in the composition of the board and its committees. I find that the participation of NPO-linked directors at the compensation committee is significant in terms of firm value, level of pay and compensation structure, but with different outcomes depending on CEO power. The results suggest that CEOs who want to increase their managerial power use the appointment of NPO-linked directors for their benefit. The main implication of these findings is that co-opting directors works as a substitute for managerial entrenchment.
“Too Big to Discipline?" (co-authored with Pablo Ruiz-Verdú)
Bank supervisors can compel banks to limit their risk by means of formal enforcement actions. Moreover, formal enforcement actions are public, so they may communicate important information to investors and depositors about banks' financial condition and, thus, constitute a source of market discipline. In this paper, we document that US supervisors appear to have a bias when issuing formal enforcement actions: very large financial institutions are less likely to receive formal enforcement actions than one would expect on the basis of their fundamentals. At the same time, they do not seem to be less risky than smaller, yet still large, financial firms. Very large financial institutions seem to be too big to be publicly disciplined.