Board structure and financial stability of financial firms: Do board policies and CEO duality matter?

Abstract

As the financial sector plays a central role in the economic development of the countries, its proper functioning is also important for other sectors. This study tests whether female and independent directors ensure financial stability in the financial firms with the moderating effect of board policies and duality where the Chief Executive Officer (CEO) also chairs the board of directors. The results reveal that while board gender diversity ensures financial stability in the full sample of financial firms and the sub-samples of Banking, Insurance, and Residential and Commercial Real Estate Investment Trusts (REITs), it does not in Investment Banking and Real Estate firms. Moreover, the findings confirm that board independence improves financial stability only in the Investment Banking sub-sector. It is noteworthy that our main results, but not the robustness tests, find that independent directors actually reduce financial stability in the Banking sub-sector. It should be noted that our findings are sometimes contingent upon the analyzed sub-sector, a country’s legal system and enforcement mechanisms, and whether the primary domicile of a company is in the European Union. Moderation analyses show that depending on the sub-sector, board policies and CEO duality have a very limited role in strengthening the directors’ monitoring function and ensuring financial stability. For five sub-sectors, far-reaching implications considering contingencies are suggested in the conclusion section.