Gender board diversity and the cost of bank loans

We examine the relationship between female board representation and the cost of lending, using a dataset of 13,714 loans from 386 banks matched with 2432 non-financial firms from 1999 to 2013. We find that firms with female directors command lower loan spreads. In addition, female independent directors have a stronger impact on lowering spreads compared to female directors' other attributes. However, as firms build relationships with their lenders this effect becomes less potent. Finally, when we introduce firm-level heterogeneity we document that changes in gender diversity exert a stronger impact on the cost of lending in the case of bank-dependent firms, especially for relationship borrowers.     

Gender diversity and financial statement fraud

This study investigates the role of gender diversity in fraud commission and detection with a view to identifying whether companies with more female corporate leaders are less likely to be involved in financial statement fraud. Using a bivariate probit model, the role of female corporate leaders in financial statement fraud commission and detection is examined for Chinese listed companies from 2007 to 2018. The representation of female corporate leaders increases the likelihood of fraud detection, thus reducing firms’ propensity to engage in fraud. The finding confirms that women are risk averse and more committed to ethical practices than men in corporate leadership positions. Moreover, this impact of gender diversity is contingent upon the nature of ultimate controllers of listed companies: more female representation in top leadership roles can mitigate fraud commission or detect fraud effectively in non-state-owned enterprises, but not in state-owned enterprises. In addition, the recent anti-corruption campaign initiated by Chinese President Jinping Xi is a powerful form of public governance. Female corporate leaders play a more positive role in mitigating fraud commission and detecting fraud commission in the post-campaign period than in the pre-campaign period.     

Board gender diversity,power, and bank risk taking

Having female board members brings ethical/societal perspectives and new resources to decision making. However, there is lack of evidence on whether it mitigates bank excessive risk-taking; hence, this paper addresses this question. It complements the normative corporate governance literature by combining agency theory and approach/inhibition theory of power from social psychology. For a sample of 195 U.S. commercial banks during 2002–2018, banks invest in more risky assets when female directors perceive the positive rewards of risky investments (in banks that have larger regulatory capital ratios and/or are well-capitalized) and when power shifts away due to CEO equity ownership. On the other hand, banks invest in less risky positions when female directors perceive the penalties inherent in a risky investment during the financial crisis. This paper provides novel evidence on the effect of gender diversity, as a governance mechanism, on risk taking in a social-psychology context. It offers insights on the effect of gender diversity on bank riskiness.     

Megamergers and expanded scope: Theories of bank size and activity diversity

We point to the vast empirical literature in banking to argue that the current expansion of scale and scope in banking represents a puzzle. We then present two explanations that help us to understand why banks are getting bigger and doing more. Our explanations suggest that banks may be doing this to increase their shareholders' wealth and/or merely to enhance the reputation of their management (CEOs). The latter could lead to herd behavior involving banks that increase size and scope despite a dissipation of shareholders' wealth. Alternatively, increasing size and scope may offer strategic benefits (and hence increase shareholder wealth) in an environment with sufficient profitability in current operations and substantial uncertainty about future core competencies. We explore conditions under which either one of these competing explanations may dominate.     

Gender,style diversity,and their effect on fund performance

This paper examines the performance of 358 European diversified equity mutual funds controlling for gender diversity. Fund performance is evaluated against funds’ designated market indices and representative style portfolios. Consistently with previous studies, proper statistical tests point to the absence of significant differences in performance and risk between female and male managed funds. However, perverse market timing manifests itself mainly in female managed funds and in the left tail of the returns distribution. Interestingly, at fund level there is evidence of significant overperformance that survives even after accounting for funds’ exposure to known risk factors. Employing a quantile regression approach reveals that fund performance is highly dependent on the selection of the specific quantile of the returns distribution; also, style consistency for male and female managers manifests itself across different quantiles. These results have important implications for fund management companies and for retail investors’ asset allocation strategies.     

Robinhood investors and corporate misconduct

Using the data of retail investors' stock holdings, this study examined the effect of corporate misconduct on investor behavior. Our results showed that the number of retail investors investing in fraudulent firms tends to increase throughout the misconduct and during the public announcement. We also found that the increased volatility of stock returns heightens the interest of retail investors in the fraudulent stocks before and during the announcement of corporate misconduct. However, there was no significant change in their number after the announcement. Retail investors did not sell fraudulent stocks that have already lost significant value after the public announcement of corporate misconduct.     

The bank capital channel and bank profits

This paper develops a microeconomic model of banking to highlight an endogenous loan creation process that emerges from bank profits via the capital accumulation of retained earnings and uses a simple bank capital‐loan multiplier to illustrate constraints on lending. The study also analyzes how sufficient net interest margins are important for banks to maintain lending portfolios and avoid financial fragility. The model offers support to bank capital channel (BKC) economists by illustrating how changes in interest rates may influence bank lending through the bank's internal capital accumulation growth rate and on a bank's portfolio choices.     

Gender diversity and earnings management: the case of female directors with financial background

Review of Quantitative Finance and Accounting - Past evidence generally suggests that the presence of female directors on corporate boards tends to improve earnings quality due to these...     

Work-from-home and the risk of securities misconduct

In the wake of the global pandemic, a challenge for CEOs and boards is to set a stakeholder-acceptable organizational balance between remote and traditional office working. However, the risks of work-from-home are not yet fully understood. We describe competing theories that predict the effect on misconduct of a corporate shift to work-from-home. Using internal bank data on securities traders we exploit lockdown variation induced by emergency regulation of the Covid-19 pandemic. Our difference-in-differences analysis reveals that working from home lowers the likelihood of securities misconduct; ultimately those working from home exhibit fewer misconduct alerts. The economic significance of these changes is large. Our study makes an important step toward understanding the link between the balance of work locations and the risk that comes with this tradeoff.     

Local corporate misconduct and local initial public offerings

This paper investigates the cost of going public through initial public offerings (IPOs) for firms located in regions with significant fraud density. We find that companies in regions with a high proportion of nearby firms that have committed corporate misconduct have more pronounced underpricing, experience higher post-IPO stock return volatility, and are more likely to withdraw their offerings. Overall, our results show that local corporate misconduct is associated with the pricing of IPOs, and the breach of trust is related to costly IPOs for newcomers.     

Politician Careers and SEC enforcement against financial misconduct

We document that corporate financial misconduct has significant consequences for politicians' election outcomes and, in particular, those politicians that serve on U.S. congressional committees with SEC-relevant oversight responsibilities (“SEC-relevant politicians”). These politicians display a 31% greater likelihood of losing a reelection campaign after a local firm faces SEC enforcement for financial misconduct. We also document that SEC-relevant politicians appear to influence the SEC to limit career effects due to the potential consequences from enforcement against local firms. First, the timing of enforcement action announcements around SEC-relevant politicians' elections appears opportunistic. Second, firms in the districts of SEC-relevant politicians are less likely to receive SEC enforcement actions relative to other firms and, when faced with enforcement, receive smaller penalties. Collectively, these results suggest that politicians' career concerns impede the SEC's enforcement efforts.     

Foreign bank entry and bank competition: Cross-country heterogeneity

This study investigates the impact of foreign bank entry on bank competition in the host countries. Using data for 148 countries over 1987–2015, I find that although on average an increase in the number of foreign banks is associated with more competition in the host country, competition increases in developed but decreases in developing countries. Stringent capital requirements, higher market entry barriers, and effective credit information sharing can mitigate the impact of foreign bank entry, while better supervision and external governance strengthen the link between foreign bank presence and competition. The findings justify the regulations on bank capital adequacy and call for an effective credit information sharing mechanism.     

The impact of gender diversity on shareholder wealth: Evidence from European bank M&A

We explore the association between board gender diversity and shareholder value creation. Specifically, we investigate the impact of gender diversity on the economic impact of bank mergers and acquisitions (M&A). We employ a multi-year sample of M&A announced by European listed banks and find that: (i) the presence of women on the board of directors has a positive and statistically significant effect on acquirer gains; and (ii) boards with three or more women, or where women represent more than 25% of the board, have a stronger impact on acquirer gains than in the opposite case, consistent with critical mass theory. Moreover, banks with a critical mass of female directors perform better in undertaking value-enhancing M&A after the global financial crisis. Policy makers and practitioners could benefit from the findings by exploiting the advantages of board heterogeneity in terms of gender.     

Learning from failures: Director interlocks and corporate misconduct

Motivated by social learning and social network theories, we argue that firms learn from failures in their director interlocked firms. Empirical results show that enforcement for violations in errant firms inhibit misconduct commitments in focal firms (i.e., firms interlocked with errant firms). We investigate the role of interlocking directors in facilitating the inhibition of misconduct. Empirical results evidence that information transmission by interlocking directors plays a crucial role in the process of inhibitive learning. Besides information transmission, we also find that interlocking directors react with higher diligence in focal firms. Further, overall diligence of independent directors in focal firms is heightened. Additionally, we test several factors that influence the significance of this inhibition, including characteristics of interlocking directors, firm features, and industry characters. Finally, the enforcement can deter more than one form of misconduct in focal firms. Overall, we thoroughly investigate the reactions of focal firms and their directors. Our study focuses on inhibitive learning, which has received limited attention in corporate finance literature.     

Capital ratios and bank lending: A matched bank approach

This paper examines the impact of bank capital ratios on bank lending by comparing differences in loan growth to differences in capital ratios at sets of banks that are matched based on geographic area as well as size and various business characteristics. We argue that such comparisons are most effective at controlling for local loan demand and other environmental factors. For comparison we also control for local factors using MSA fixed effects. We find, based on data from 2001 to 2011, that the relationship between capital ratios and bank lending was significant during and shortly following the recent financial crisis but not at other times. We find that the relationship between capital ratios and loan growth is stronger for banks where loans are contracting than where loans are expanding. We also show that the elasticity of bank lending with respect to capital ratios is higher when capital ratios are relatively low, suggesting that the effect of capital ratio on bank lending is nonlinear. In addition, we present findings on the relationship between bank capital and lending by bank size and loan type.     

Corporate misconduct,media coverage,and stock returns

This study examines the impact of increased investor attention to corporate misconduct (CM) on stock returns. We show that media coverage provides an important channel through which investor awareness of corporate wrongdoings can be enhanced. Using a unique research setting in Korea based on text analysis during the 2008–2020 period, we find that investors exhibit short-term adverse reactions to CM events. More importantly, the increased social awareness of CM issues through media coverage leads investors to penalize firms more severely. We also find that the adverse reaction to CM events is more prominent for firms with a greater negative media tone and surprise. The combined evidence supports the investor attention theory. Furthermore, the negative effects of CM on stock returns are smaller for firms with positive Corporate Social Responsibility (CSR) and Environmental, Social, and Governance (ESG) reputations, consistent with the insurance theory.     

Information verifiability, bank organization, bank competition and bank-borrower relationships

This paper investigates whether the benefits of bank-borrower relationships differ depending on three factors identified in the theoretical literature: verifiability of information, bank size and complexity, and bank competition. We extend the current literature by analyzing how relationship lending affects loan contract terms and credit availability in an empirical model that simultaneously accounts for all three of these factors. Based on Japanese survey data we find evidence that the benefits from stronger bank-borrower relationships in terms of credit availability are limited to smaller banks. However, when the benefits are measured as improved credit terms, we find little additional benefit, and in some cases increased cost, from stronger relationships for opaque borrowers and for borrowers who get funding from small banks. These latter findings suggest the possibility that relationship borrowers may suffer from capture effects.     

Governance and bank valuation

This paper assesses the impact of the ownership structure of banks and shareholder protection laws on bank valuations while controlling for differences in bank regulations. Except in a few countries with very strong shareholder protection laws, banks are not widely held. Rather, families or the State control banks. Furthermore, (i) larger cash-flow rights by the controlling owner boost valuations, (ii) stronger shareholder protection laws increase valuations, and (iii) greater cash-flow rights mitigate the adverse effects of weak shareholder protection laws on valuations. These results suggest that ownership structure is an important mechanism for governing banks.