Abstract
Regulators generally discourage bank CEOs also holding the role of board Chairman, as this governance structure can hinder independent decision-making and effective risk oversight. This study examines the issue of CEO Duality, identifying a positive relation to greater risk-taking across a battery of sensitivity tests. In further analysis, the study controls for differences in supervisory monitoring levels to examine its impact. Banks led by CEO Chairmen which are subject to lower levels of supervision continue to report a robust association to risk-taking, as before. However, this association dissipates for banks which are subject to heightened supervisory monitoring. These findings indicate that agency costs related to Duality may be moderated by greater regulation. This paper weighs-in on the controversy relating to a single contentious governance structure (i.e., CEO Duality), thus informing boards, regulators and researchers of the need to consider the overall interplay of monitoring mechanisms.
Highlights
Corporate governance failures contributed to the severity of the financial crisis
Rediker and Seth (1995) call out for further empirical examination of Duality, little is known about the interaction monitoring mechanisms (Krause et al 2014). This is the first study known to the authors concentrating on Duality and Bank Holding Company (BHC) risk-taking in the post financial crisis period, exploiting the potential interaction of external supervision and heightened governance as alternative monitoring mechanisms in this setting
Duality is one per cent positively related to Tier 1 levels in column 2, with a coefficient value suggesting on average BHCs with dual governance structures of Chief Executive Officers (CEOs) and the Chairman carries a further 59 basis points of capital
Summary
Corporate governance failures contributed to the severity of the financial crisis. While poorly structured incentive schemes, high leverage levels and complex financial products played their role, all too often powerful bank Chief Executive Officers (CEOs) became the recognized face of excessive risk-taking gone wrong. The DoddFrank Act (2010) designated certain BHCs as Systemically Important Financial Institutions (e.g., “SIFIs”), resulting in varying intensity levels of external and internal monitoring (Gao et al 2013) Since both SIFI and non-SIFI are included in this BHC sample, a unique window exists to observe the impact of Duality upon risk-taking given the varying degrees of regulation. Rediker and Seth (1995) call out for further empirical examination of Duality, little is known about the interaction monitoring mechanisms (Krause et al 2014) This is the first study known to the authors concentrating on Duality and BHC risk-taking in the post financial crisis period, exploiting the potential interaction of external supervision and heightened governance as alternative monitoring mechanisms in this setting. The findings are robust to a range of sensitivity analysis, such as reverse causality, omitted variables bias, and alternative measures of CEO power
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