Are Outside Directors with Greater Board Tenure Valuable? Evidence from the Last Credit Crisis

Abstract

Analyses of bank performance around the 2007-2008 financial crisis suggest that outside directors with financial experience acquired through longer board service at their own banks are more effective than those with financial experience attained elsewhere. Institutions with more long-tenured independent directors (i) earn higher CARs around the collapse of both Bear Stearns and Lehman Brothers, (ii) limit their risk exposure before the crisis, (iii) exhibit better stock return and accounting performance during the crisis, (iv) are less likely to be bailed out by the U.S. government’s Troubled Assets Relief Program (TARP), and (iv) receive proportionally less financial assistance from TARP.

Keywords: Financial expertise, Credit crisis, Bank returns, Moral hazard, Bailouts

JEL Classification: G21, H81, K23