Manuscript Type: EmpiricalResearch Question/Issue: There is a general consensus that the lack of restraint by US financial firm executives to engage in risky subprime mortgage lending practices played a contributing role in both the inflation and deflation of the housing bubble at the heart of the global financial crisis. Evidence is less clear on what influenced the managerial proclivity to ignore warning signs and take on more and more risk to the detriment of numerous firm stakeholders. Our study examines the effects of power on Managerial Risk Taking in the context of the subprime mortgage industry. Research Findings/Insights: We hypothesize that a CEO's power is positively related to excessive risk taking. We find general support for these hypotheses in a matched pair sample of 74 firms and 344 firm years, where half the firms specialized in subprime lending and the other did not from 1997 to 2005. Theoretical/Academic Implications: We take a novel theoretical approach to our research by drawing from the social psychology literature to employ the approach/inhibition theory of power. The use of this theoretical perspective affords the opportunity to contribute a nuanced understanding of how managerial power within an agency-based governance framework propels managers from taking reasonable risks to engaging in excessive risk taking. Practitioner/Policy Implications: By presenting evidence of the role CEO Power had in promoting excessive risky lending practices, corporate directors and policy makers will be empowered and more capable of designing and enacting governance and regulatory frameworks that result in not only profitable but prudent risk taking.
Manuscript Type: Empirical Research Question/Issue: The origins of the global financial crisis have been attributed to the combination of a housing price bubble and innovative financial instruments, as well as the lack of restraint by corporate executives and boards to engage in excessive risk-taking. The rise in subprime lending between 1997 and 2005 played a crucial role in inflating the housing price bubble. We take a unique dataset of US financial institutions heavily engaged in subprime lending and ask the following research question: Did board configuration play a role in determining whether a financial institution specialized in subprime lending? Research Findings/Insights: We use a matched-pair sample of firms in the financial industry from 1997-2005 with half of the sample specializing in subprime lending and conduct panel data logistic regression analysis. We find that the board configurations of those financial institutions that engaged in subprime lending were significantly different from those that did not. Specifically, subprime lenders had boards that were busier, had less tenure, and were less diverse with respect to gender. Theoretical/Academic Implications: This study uses the group decision making perspective in the context of subprime lending to examine board of director configuration and its influence on decision making processes around the issue of risky subprime lending. Findings show that how boards were configured did influence the decision to specialize in subprime lending. We find robust support for predictions based on the group decision making perspective. Practitioner/Policy Implications: The deterioration of mortgage lending requirements that gave rise to the defaults of so many subprime loans, in retrospect, appears to be something that should have been entirely preventable. By demonstrating that subprime specialists had significant differences in board configuration that impacted group decision making, this study offers guidance to policymakers considering additional regulation and for corporate officers examining corporate governance issues.
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