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Neglecting Peter to Fix Paul: How Shared Directors Transmit Bank Shocks to Nonfinancial Firms

Published online by Cambridge University Press:  27 July 2020

Leonid Pugachev Open the ORCID record for Leonid Pugachev [Opens in a new window]  and
Andrea Schertler
Leonid Pugachev*
Affiliation:
Rochester Institute of Technology Saunders College of Business
Andrea Schertler
Affiliation:
Institute of Banking and Finance, University of Grazandrea.schertler@uni-graz.at
*
lpugachev@saunders.rit.edu (corresponding author)
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Abstract

We trace a corporate governance channel of bank shock transmission into the real economy. Using 1,245 U.S. bank enforcement actions (EAs) issued between 1990 and 2017, we show that when a nonfinancial firm (NFF) and bank share a common director, NFF stock prices fall around bank EAs. Severe EAs elicit more negative returns. During enforcement, valued directors substitute NFF board meeting attendance with bank board meeting attendance. Impaired credit relationships, director reputational damage, and endogenous director selection cannot fully explain our results. These findings imply that shared directors could transmit larger bank shocks into the real economy.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 6 , September 2021 , pp. 2170 - 2207
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank Ron Masulis (the referee) for suggestions that substantially improved this paper. Additionally, it benefited from the feedback of René Adams, Tor-Erik Bakke, Jeffrey Black, Wenbin Cao, Sarah Clayton, Chanaka Ganepola, Scott Guernsey, Stan Hoi, Timothy King, Christopher Koch, Gabriele Lattanzio, Dietmar Leisen, Jeanette Ling, William Megginson, Mitchell Peterson, Andreas Pfingsten, Anthony Saunders, Matthew Souther, Ettore Spadafora, Tracy Wang, Hao Zhang, seminar participants at the University of Darmstadt and University of Osnabrück, as well as participants at the 2019 AEA, 2018 HVB conference, 2018 IRMC, 2018 FMA Europe, and 2018 EFMA. We thank Marina Heck for providing excellent research assistance. Any remaining mistakes are our own. The study was written while Schertler was visiting the University of Oklahoma (OU). She gratefully acknowledges OU’s hospitality and support.

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