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

See all articles by Dietmar Leisen

Dietmar Leisen

Johannes Gutenberg University Mainz - Department of Banking

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

Date Written: November 29, 2019

Abstract

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

Leisen, Dietmar P. J. and Swan, Peter Lawrence, When the Remedy Is the Problem: Independent Boards, Short-Termism, and the Subprime Crisis (November 29, 2019). 31st Australasian Finance and Banking Conference 2018, Available at SSRN: https://ssrn.com/abstract=3180259 or http://dx.doi.org/10.2139/ssrn.3180259

Dietmar P. J. Leisen (Contact Author)

Johannes Gutenberg University Mainz - Department of Banking ( email )

Jakob-Welder-Weg 9
Mainz, D-55099
Germany
++49-6131-39 22097 (Phone)
++49-6131-39 23971 (Fax)

HOME PAGE: http://www.finserv.bwl.uni-mainz.de/index_ENG.php

Peter Lawrence Swan

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
Australia
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

HOME PAGE: http://https://www.business.unsw.edu.au/our-people/peterswan

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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