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Bank institutional setting and risk-taking: the missing role of directors’ education and turnover

Bank institutional setting and risk-taking: the missing role of directors’ education and turnover This paper aims to analyze the relationship between bank institutional setting and risk-taking by exploring whether board education and turnover are drivers of the risk propensity of cooperative banks compared to joint-stock banks.Design/methodology/approachBased on a comprehensive data set of Italian banks over the 2011-2017 period, this paper examines whether these board characteristics affect the risk propensity of cooperative and joint-stock banks. Bank risk is measured by the Z-index, profit volatility and the ratio of non-performing loans to total gross loans.FindingsThe findings show that cooperatives take less risk than joint-stock banks and have lower board turnover and education. Furthermore, this study finds that while board education mediates the relationship between the cooperative model and bank risk-taking, there is no evidence for board turnover. Thus, the lower educational level of cooperative directors contributes to explaining the lower risk-taking of cooperative banks.ImplicationsThe findings have several implications. In terms of the more general policy debate, the results point to the need to strengthen the governance model for both joint-stock and cooperative banks while supporting the view that a more ad hoc perspective on the best models and practices for each type of institutional setting would be preferable. In particular, the study reveals how board education’s effects on bank risk-taking should be carefully monitored.Originality/valueThrough a mediation framework, this study provides empirical evidence on the relationship between bank institutional setting (by distinguishing between cooperative and joint-stock banks) and risk-taking behavior by exploring the underlying mechanisms at the board level, which is novel in the literature. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Corporate Governance Emerald Publishing

Bank institutional setting and risk-taking: the missing role of directors’ education and turnover

Corporate Governance , Volume 19 (4): 32 – Aug 13, 2019

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1472-0701
DOI
10.1108/cg-01-2019-0013
Publisher site
See Article on Publisher Site

Abstract

This paper aims to analyze the relationship between bank institutional setting and risk-taking by exploring whether board education and turnover are drivers of the risk propensity of cooperative banks compared to joint-stock banks.Design/methodology/approachBased on a comprehensive data set of Italian banks over the 2011-2017 period, this paper examines whether these board characteristics affect the risk propensity of cooperative and joint-stock banks. Bank risk is measured by the Z-index, profit volatility and the ratio of non-performing loans to total gross loans.FindingsThe findings show that cooperatives take less risk than joint-stock banks and have lower board turnover and education. Furthermore, this study finds that while board education mediates the relationship between the cooperative model and bank risk-taking, there is no evidence for board turnover. Thus, the lower educational level of cooperative directors contributes to explaining the lower risk-taking of cooperative banks.ImplicationsThe findings have several implications. In terms of the more general policy debate, the results point to the need to strengthen the governance model for both joint-stock and cooperative banks while supporting the view that a more ad hoc perspective on the best models and practices for each type of institutional setting would be preferable. In particular, the study reveals how board education’s effects on bank risk-taking should be carefully monitored.Originality/valueThrough a mediation framework, this study provides empirical evidence on the relationship between bank institutional setting (by distinguishing between cooperative and joint-stock banks) and risk-taking behavior by exploring the underlying mechanisms at the board level, which is novel in the literature.

Journal

Corporate GovernanceEmerald Publishing

Published: Aug 13, 2019

Keywords: Corporate governance; Cooperative banks; Bank ownership; Board of directors; Bank risk

References