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Financial Expertise of Directors

  • A. Burak Güner
  • Ulrike Malmendier
  • Geoffrey Tate

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11914.

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Date of creation: Jan 2006
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Publication status: published as Güner, A. Burak, Ulrike Malmendier, and Geoffrey Tate. "Financial expertise of directors." Journal of Financial Economics 88, 2 (May 2008): 323-354.
Handle: RePEc:nbr:nberwo:11914
Note: CF LS
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