Research Insights: Stretched too Thin?
Because of the banking sector’s centrality in the economy, it is hit by significant shocks and is highly regulated. Also, banks often share directors with nonfinancial firms (NFF). What happens when such a bank is hit with an enforcement action and the director’s attention is sharply focused on the bank?
Leonid Pugachev, assistant professor of finance and accounting in Saunders College, and a co-author studied the negative effects of banking enforcement actions (EA) on NFFs that share a director with a bank, in their article “Neglecting Peter to Fix Paul: How Shared Directors Transmit Bank Shocks to Nonfinancial Firms,” published in the Journal of Financial and Quantitative Analysis. Focusing on the years 1990 to 2017, they identified 1,245 enforcement actions issued to 159 banks that collectively share 763 directors with 792 NFFs. Their analysis showed that the NFFs suffered stock declines around bank EA issue dates.
Why? Pugachev posits, when banks are hit with EAs, the directors must devote a lot of much time to the bank, leaving them with and have fewer resources to dedicate to for other firms of which they are directors for. These findings imply that shared directors could transmit larger bank shocks into the real economy.
View paper published in the Journal of Financial and Quantitative Analysis, revised June 6, 2017: Neglecting Peter to Fix Paul: How Shared Directors Transmit Bank Shocks to Nonfinancial Firms.