What if your bank is an echo chamber?

In two articles with Catarina Fernandes (ORGMAN), Francisco Vitorino Martins (FEP.UP) and Cesário Mateus (University of Greenwich Business School), Jorge Farinha (ORGMAN) investigates the effect of the composition of boards and of governance structures on banks’ performance and failure during crises. ‘One of the main ideas that I learned from my experience in the industry is that periods of crisis require a different approach than normal times’, Jorge tells us. ‘The board and governance must be adequate to the period in question.’

In a first study, the authors examine the likelihood of a bank bailout after the 2007-08 financial crisis. Using a probit model with cross-sectional data from 72 European banks, they find that ‘perhaps in contrast with what happens in normal times, when there is a crisis it is important to have experienced boards, with a long tenure in the institution’. ‘This’, Jorge goes on to add, ‘is at odds with the measure of appointing outsiders with no banking experience, as has happened in Portugal’.

In a follow-up article, using weighted least squares, the authors show that these insights extend to other measures of performance, namely stock returns. Here, the authors also find that diversity improves performance in a period of crisis: boards with members of different genders and age groups performed better. As Jorge stresses, ‘this supports the view that diversity is relevant. From diversity stems new ideas – and this is fundamental in a context of uncertainty and drastic changes. Similar individuals share more or less the same ideas. Diversity fosters a more profound reflection that can be beneficial to the institution.’

Currently, Jorge is working on topics such as special purpose acquisition companies (SPACs) and cash-holdings. Following the recent popularity of the former kind of operation, Jorge is analyzing how its performance depends on the characteristics of its promoters. As for the latter, his investigation focuses on understanding firms’ cash-holding strategies.

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Jorge Farinha is Assistant Professor of Finance at FEP, where he is the Director of the Master in Finance. His main research interests include corporate governance, corporate finance, banking, dividend policy, and earnings management. He may be reached at jfarinha@fep.up.pt.