Are Two Heads Better than One? Evidence from the Thrift Crisis
April 3, 2012
In a new study in the Journal of Banking and Finance, researchers employ a natural experiment from the 1980s, predating the ubiquitous clamor for independence influenced corporate governance structures, to examine which governance mechanisms are associated with firm survival and failure. They find that thrifts were more likely to survive the thrift crisis when their CEO also chaired the firm's board of directors.
- On average, chair-holding CEOs undertook less aggressive lending policies than their counterparts who did not chair their boards.
- Consequently, taxpayer interests were protected by thrifts that bestowed both leadership posts to one person.
This is an important policy issue because taxpayers become the residual claimants for depository institutions that fail as a result of managers adopting risky strategies to exploit underpriced deposit insurance. The study's findings corroborate recent evidence that manager-dominated firms resist shareholder pressure to adopt riskier investment strategies to exploit underpriced deposit insurance.
Source: John Byrd et al., "Are Two Heads Better than One? Evidence from the Thrift Crisis," Journal of Banking and Finance, April 2012.
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