Bank board changes in size and composition: Do they matter for investors?

Abstract

Research Question/Issue: This research seeks to explain whether changes in bankboard size and/or composition signal the effectiveness of the board in terms ofmonitoring and advising.Research Findings/Insights: Our contribution provides empirical evidence on thenegative reaction of investors to board changes, identifies the variables that explainthis reaction, and finds that banks with experienced executive directors on theirboard are candidates to announce increases in board size. Our empirical analysis isbased on 608 announcements by banks headquartered in 19 European countriesover the period 2003 – 2015. We apply the Event Studies methodology, Heckman'sanalysis, system estimator regressions, and probit analysis.Theoretical/Academic Implications: Our results allow us to conclude that investorsperceive changes in board composition as an ineffective response to bank problems,except when the changes increase the number of non-executives. Bank shareholderspositively value board changes when the bank has a powerful corporate executiveofficer and negatively value those banks with high dividends that announce thesechanges. Banks with higher interest margin and higher executive experience andseniority are more prone to make changes in board size and composition, while thosewith powerful corporate executive officers, executive directors distracted by theirresponsibilities on other boards, higher non-executive attrition, where all non-executives are male, with one-tier boards, headquartered in a large country, or thosedelisting from stock markets will avoid changes in board size.Practitioner/Policy Implications: This study offers insights to policy makers inter-ested in enhancing banks' corporate governance. Boards should improve the informa-tion and transparency of their announcements to signal the effectiveness of boarddecisions. In addition, it provides insights about the influence of Board Chairs whohold the position of corporate executive officer in the design and effectiveness ofbanks' corporate governance.