Board of Directors and Credit Risk-Taking: Evidence from Taiwanese Commercial Banks
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Abstract
Using a sample of Taiwanese commercial banks between 2006 and 2018, this study finds evidence of a link between risk-taking behavior and multiple board characteristics that enhance board monitoring. . Risk-taking behavior is measured in terms of the average credit rating of the borrowing firms. The level of risk-taking decreases as the proportion of independent directors, financial expertise directors, insider directors, and female directors increases. Risk-taking increases in the percentage of shares pledged by directors. Board size and the presence of a risk management committee have no significant effect on risk-taking policies. We find no significant relationship between board structure and the percentage of non-performing loans, highlighting the importance of assessing credit risk-taking via an ex-ante measure. The causal inference is established using an instrumental variable approach. In addition, in more complex informational environments or during a financial crisis, the monitoring effect of independent directors and financial directors is sustained, while the influence of female directors weakens significantly. The results indicate that board independence, expertise, and directors’ pledging of shares are the main factors that contribute to the effective monitoring of credit risk, and suggest that policy makers may effectively target bank risk-taking policy through regulating board structure.
