Celebrating Success – Roba Ashraf Abdelbadie & Dr Aly Salama

Roba Ashraf Abdelbadie & Dr Aly Salama had a paper (Corporate Governance and Financial Stability in US Banks: Do Indirect Interlocks Matter?) accepted for publication by Journal of Business Research.

Brief information about the paper to go on the blog:

In the context of the Depository Institution Management Interlocks Act of 1978 (Interlocks Act), we investigate the structure and implications of the professional connections among bank directors. Using a sample of 168 US commercial banks that were listed consistently in the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), and Nasdaq in the period 2009 to 2015, we found that indirect interlocks are used commonly for professional connections among bank directors. We also found that well-connectedness among banks is significantly associated with a low credit risk and a low insolvency risk, but with a high capital risk. Our results are consistent with the extended resource-based view (RBV) perspective, indicating that directors of well-connected bank boards are highly qualified and competent to protect various stakeholder interests by mitigating both bank credit risk and bank insolvency risk. Moreover, but contrary to our expectation, well-connected boards signal a new model of shareholder-friendly boards that, through minimising the adverse effects of holding very high capital ratios, favours the interests of bank shareholders, while at the same time, avoiding high-risk decisions and strategies. Our additional analysis demonstrates the persistent effect of bank well-connectedness on the following year’s bank risk exposures. This study offers several contributions. Based on the extended RBV, we broaden the focus of board quality research to link interbank networks, in a setting that prevents direct interlocks among competing companies, with bank financial stability. Our evidence contributes to both the banking and corporate governance literature by proposing board social capital created by professional connections among bank directors as an antecedent of bank financial stability. Attention, then, will be directed to the professional connections among competitors as a new informal governance mechanism in the US banking sector that affects board ability to perform its tasks. In this context, this study challenges the universality of admonitions for communications among US competitors. Our evidence suggests that the Interlocks Act and bank governance reforms need to consider the role of professional communications among bank directors to fully achieve their intended goals.