Do Independence and Financial Expertise of the Board Matter for Risk Taking and Performance?

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Abstract
We examine how risk taking and firm value are related to independence and financial expertise of the board for a large sample of U.S. financial institutions both before and during the financial crisis. During the crisis, financial expertise is negatively related to both changes in Tobin’s Q and cumulative stock returns. The effect is stronger for larger banks. Results on independence and performance during the crisis are mixed. However, independence is associated with a significantly higher probability of getting TARP funds, while financial expertise is not. In the run-up to the crisis, market-based measures of risk are negatively related to the percent of independent directors and positively related to financial expertise. Furthermore, both stock performance prior to the crisis and leverage are positively related to the financial expertise of the board. These associations are again primarily driven by large banks in our sample. Overall, our results are consistent with financial expertise being associated with more risk taking and higher firm value prior to the crisis and lower performance when the crisis hits.