The impact of the board of directors characteristics on corporate performance and risk-taking before and during the global financial crisis

Abstract

Over recent years, the effectiveness of good corporate governance practices has received considerable attention by the financial literature. In the current global finance crisis, several practitioners, academic and regulators argue that mechanisms of corporate governance have not served their purpose to safeguard equitably the interest of stakeholders, increasing the corporate risk-taking without proper management. This research contributes to the empirical literature, analyzing the impact of board characteristics and the capital structure on corporate performance and corporate risk-taking, in two different economic contexts: in an economic growth and in an economic recession. The methodology implemented takes into account the bidirectional causality and addresses endogeneity problem using a simultaneous equations system with three-stage least squares estimation method. The results show that the effectiveness of the board is sensitive to the economic period and the capital structure leads to reduce the levels of corporate risk-taking during the crisis. This research suggests that good corporate governance mechanisms should mitigate excessive corporate risk-taking and protect the interest of stakeholders in both periods: before and during the global financial crisis.