Academic directors on bank boards: Do they add value?

Abstract

Purpose Using a longitudinal data set from India, this study aims to investigate the relevance of academic directors (ADs) on bank boards. More specifically, this study examines the likelihood of ADs on boards, separately for state-owned banks (SOB) and domestic private banks (private banks); the association between ADs and bank performance; and the impact on credit policies. Design/methodology/approach To address potential endogeneity concerns, this study uses instrumental variable (IV) regression to tease out the causal impact. Findings The findings indicate that larger, well-capitalised banks with a transnational presence are more likely to hire ADs, which is reflected in their performance metrics, although the response differs across bank ownership types. In addition, this study demonstrates that the specialisation of ADs is significant for credit behaviour. Research limitations/implications Two competing views in outside director literature are the expertise and too-interconnected-to-fail hypotheses. The findings support the expertise hypothesis in SOBs, whereas the latter appears more pertinent for private banks. Practical implications The findings provide a strong rationale regarding the relevance of ADs on bank boards. Indeed, the justification for having such directors differs between state-owned and private banks, suggesting that banks leverage different sets of ADs to improve performance and safeguard their business interests. Originality/value Although the literature has discussed the usefulness of several categories of outside directors, the relevance of ADs, especially on boards of financial firms, is an understudied aspect, particularly from the standpoint of an emerging economy. Viewed from this perspective, the analysis contributes to the existing evidence by highlighting the relevance of ADs on the boards of banks across different ownership categories.