Could “Lehman Sisters” reduce bank risk‐taking? International evidence

• Published date: 01 March 2024
• Author: Anh Hoang,Qiongbing Wu
• Date: 01 March 2024
• DOI: http://doi.org/10.1111/corg.12530

ORIGINAL ARTICLE

Could “Lehman Sisters”reduce bank risk-taking? International

evidence

Anh Hoang

1,2

| Qiongbing Wu

1

1

School of Business, Western Sydney

University, Parramatta, New South Wales,

Australia

2

Faculty of Economics and Management,

Thuyloi University, Hanoi, Vietnam

Correspondence

Qiongbing Wu, School of Business, Western

Sydney University, Parramatta, NSW 2150,

Australia.

Email: l.wu@westernsydney.edu.au

Abstract

Research question/issue: Since the global financial crisis triggered by the collapse of

Lehman Brothers, board gender diversity has attracted growing attention among aca-

demia and policy makers. The “Lehman Sisters”hypothesis argues for more female

representation on bank director boards based on the stereotyped gender gap in risk

preference, which has been widely supported by empirical studies on nonfinancial

firms. However, due to the constraint of data unavailability, empirical research on

board gender diversity and bank risk-taking is relatively scarce and mostly confined

to individual developed markets with inconclusive findings. In this paper, we examine

the impact of board gender diversity on bank risk-taking using a large hand-collected

dataset covering 480 commercial banks across 18 developed and 21 developing

countries over the period 2007–2016.

Research findings/insights: We find that lower bank risk-taking is associated with

greater board gender diversity, supporting the “Lehman Sisters”hypothesis in the

international context; however, this effect is significantly weakened in countries with

more hostile perception toward working women. We also confirm the critical thresh-

old of three female directors to play a significant role in reducing bank risk-taking,

providing novel international evidence in support of the critical mass theory from the

banking sector.

Theoretical/academic implications: Our findings help to reconcile existing contradic-

tory empirical evidence from different countries by highlighting the importance of

cultural effects.

Practitioner/policy implications: We provide the first international empirical evi-

dence in support of the policies aimed to promote representation of women on direc-

tor boards, particularly in the banking sector. We confirm that a critical mass number

of female directors on a bank board is important to avoid the tokenism problem. In

countries with less support toward working women, policy makers also need to work

on improving the overall working environment for women in order to achieve the

expected outcome.

Received: 19 January 2022 Revised: 26 February 2023 Accepted: 10 April 2023

DOI: 10.1111/corg.12530

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium,

provided the original work is properly cited.

© 2023 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd.

Corp Govern Int Rev. 2024;32:297–321. wileyonlinelibrary.com/journal/corg 297

KEYWORDS

bank risk-taking, board gender diversity, corporate governance, critical masstheory, Lehman

Sisters hypothesis

“If Lehman Brothers had been a bit more Lehman Sisters

…we would not have had the degree of tragedy that we

had as a result of what happened.”(03/2012)

-----Christine Lagarde

President of the European Central Bank

Managing Director of IMF (July 2011-Sept 2019)

1|INTRODUCTION

Since the global financial crisis (GFC) triggered by the collapse of Leh-

man Brothers, board gender diversity has attracted dramatic attention

among policymakers and academia. What if Lehman Brothershad been

“Lehman Sisters”? Someof the world's economic leaders have publicly

argued that the male domination of the banking industry made the

collapse of Lehman Brothers more likely

1

and called for more female

leader representation in the banking system. This premise arose inthe

years following the GFC andlater became well-known as the “Lehman

Sisters”hypothesis. The notion underlying the “Lehman Sisters”

hypothesis is that women are typically more risk-averse than men, and

more female representation on boards would have contained the

excessive risk-taking of banks and avoided the subsequent collapse.

Writing on the International Monetary Fund (IMF) Blog in memory of

the 10th anniversary of the Lehman Brothers' collapse, Christine

Lagarde (2018),the then head of the IMF, said that significant measures

had been taken to fix thefinancial system; however, more work needed

to be done, particularly on gender diversity. Concurred with the

“Lehman Sisters”hypothesis, more and more countries have imposed

the gender quotapolicy on corporate director board since the GFC.

2

The argument of the “Lehman Sisters”hypothesis has been

supported by some empirical studies on non-financial firms which

document the negative effect of women directors (or executives) on

firm risky decisions or risk-taking (Faccio et al., 2016; Huang &

Kisgen, 2013; Levi et al., 2014). Nevertheless, these findings may not

be applicable to banks since bank corporate governance is remarkably

different (Adams & Mehran, 2012; Elyasiani & Zhang, 2015) due to

the uniqueness of the banking industry. First, unlike other industries

where the failure of a large company may not affect other firms within

the same industry, the failure of one large bank may trigger the failure

of other banks with sound financial conditions since bank failure is

generally contagious (Aharony & Swary, 1996; Pino & Sharma, 2019;

Rajan & Ramcharan, 2016). Second, given the essential role of bank

functioning in a country's economic activities, the banking industry is

heavily regulated compared with other industries; thus, bank boards'

fiduciary responsibilities extend beyond shareholders to include other

stakeholders such as regulators (Adams & Mehran, 2003; Elyasiani &

Zhang, 2015), depositors, and bondholders (Macey, & O'hara, 2003).

Furthermore, banks generally have larger boards and more

independent directors than non-bank companies (Adams &

Mehran, 2003; Kroszner & Strahan, 2001). However, empirical

research on board gender diversity and bank risk-taking is relatively

scarce and mostly confined to individual developed markets with

inconclusive findings (Adams & Ragunathan, 2017; Berger et al., 2014;

Gulamhussen & Santa, 2015; Prete & Stefani, 2015). Adams (2016),

who is skeptical about the “Lehman Sisters”hypothesis, calls for more

empirical research in order to better understand the benefits of board

gender diversity. She also recognizes the challenges faced by existing

literature, particularly the limitation of data unavailability, in develop-

ing informed research and policy.

To the best of our knowledge, this research is the first empirical

study to examine the impact of board gender diversity on bank risk-

taking using a large sample of commercial banks

3

from both devel-

oped and developing countries. We overcome the data limitations of

existing literature by manually collecting the gender information of

bank boards from individual banks' annual reports and other publicly

available sources, such as Google search, Bloomberg, and LinkedIn.

We also utilize Google translator to identify the required information

from non-English annual reports and public sources. After matching

the data from different databases, eventually, we have a rich sample

of 480 publicly listed banks across 18 developed and 21 developing

countries over the period of 2007–2016.

Controlling for a number of variables at board, bank, banking

industry, and country levels, we find that lower bank risk-taking, prox-

ied by Z-score that measures the overall risk of a bank, is associated

with greater board gender diversity, lending support to the “Lehman

Sisters”hypothesis in the international context. Female directors are

generally more risk-averse and less overconfident, resulting in less

risky decisions by director boards with greater female representation.

Furthermore, female directors are more stakeholder-oriented (Adams

et al., 2011; Adams & Funk, 2012) and more active in monitoring

managers than their male counterparts (Adams & Ferreira, 2009;

Schwartz-Ziv, 2017) so that they can influence the board to better

represent the interests of non-equity stakeholders who have less

incentive to take risks than shareholders. However, this effect is sig-

nificantly weakened in countries with more hostile perception toward

working women and during the GFC for the countries that were

severely affected. We find no evidence that the government owner-

ship of banks would shape the relationship between bank risk-taking

and board gender diversity, although government-owned banks gen-

erally have higher risk. Our results are robust to alternative proxies for

bank risk-taking, an alternative measure of board gender diversity,

and unobservable heterogeneity and simultaneity. We also find that

the number of female directors matters and confirm the threshold of

three female directors to play a significant role in reducing bank risk-

taking, providing new international evidence in support of the critical

mass theory from the banking sector.

298 HOANG and WU