When the Remedy Is the Problem: Independent Boards, Short-Termism, and the Subprime Crisis
35 Pages Posted: 14 Jun 2018 Last revised: 3 Dec 2019
Date Written: November 29, 2019
We study the independence ratio, as well as the prestige, reputational incentives, experience, and financial expertise of independent directors for 767 U.S. banks from 2000 to 2015, to concentrate on causes of the subprime crisis: short-termism, poor monitoring, and excessive risk-taking. We find that higher independence ratios decrease the monitoring quality of the board, increase short-term incentives for the CEO, and promote greater subprime risk-taking. Our results thereby suggest that, while official responses to the subprime crisis claim that banks were not independent enough, rising independence ratios following Enron and Sabanes Oxley were a major contributing cause of the subprime crisis.
Keywords: G21; G32; G34
JEL Classification: Subprime, Bank governance, Independent directors, Prestigious directors, Short-termism
Suggested Citation: Suggested Citation