Political connections and banking performance: the moderating effect of gender diversity

• Date: 13 July 2020
• Pages: 1001-1028
• DOI: https://doi.org/10.1108/CG-01-2020-0018
• Published date: 13 July 2020
• Author: Catarina Proença,Mário Augusto,José Murteira
• Subject Matter: Strategy,Corporate governance

Political connections and banking

performance: the moderating effect of

gender diversity

Catarina Proença, M

ario Augusto and José Murteira

Abstract

Purpose –This study aims to investigate the role of boardgender diversity in explaining the effects of

board members’political connections on bankingperformance in the Eurozone.

Design/methodology/approach –This paper analyses panel data on 83 banks supervised by the

European Central Bank (ECB) for the period 2013–2017, using a generalized moment method-type

estimationmethodology.

Findings –Resultssuggest that when gender diversity is high,there is a U-shaped nonlinear relationship

between political connections and banking performance. Empirical evidence also indicates that

differentiatingcharacteristics of women, such as greater ethicalconcern and risk aversion, help mitigate

the negative effects of political connections on banking performance, safeguarding the institutions’

interests from the adverse effects of personal agendas. In addition, these results also suggest that a

minimum of 14% of gender diversity can contribute to greater social justice and beneficial structural

change.

Research limitations/implications –The period studied may not yet fully reflect the impact of the

assessmentof the board members’ suitability.

Practical implications –The paper contributes to the growing literature on political connections and

gender diversity, providing greater insight into their role as determinants of banking performance. The

study also suggests the benefits and possible limitations of the regulator’s two impositions –gender

diversityquotas and members’ repute (members’political connections).

Originality/value –The effect of gender diversityon the impact of board members’ political connections

on banking performancehas not been studied, as these relationshipshave not been analysed separately

for banks directlysupervised by the ECB.

Keywords Political connections, Gender diversity, Bank performance, ECB, GMM

Paper type Research paper

1. Introduction

The composition of corporate Boards of Directors has received increasing attention from

both investors and shareholders (Tanaka, 2019;Wang et al., 2018). This issue has received

particular notice following the financial scandals of recent decades (namely, WorldCom

bankruptcy and 2008 financial crisis) being also driven by the need to improve the

effectiveness of these boards (Nyamongo and Temesgen, 2013;Reguera-Alvarado et al.,

2017). Boards are composed of elements with diverse attributes, characteristics and

knowledge, which contribute to the group as a whole (Walt and Ingley, 2003). Two of these

characteristics have receivedparticular attention in recent literature:

1. The presence of politicians or former politicians in company boards (Chen et al., 2018;

Lin et al., 2015;Wong and Hooy, 2018), leading to political connections of board

members; and

Catarina Proenc¸a,

M

ario Augusto and

Jose

´Murteira are all based

at the Faculty of

Economics, University of

Coimbra, CeBER, Coimbra,

Portugal.

Received 15 January 2020

Revised 2 April 2020

1 June 2020

Accepted 11 June 2020

DOI 10.1108/CG-01-2020-0018 VOL. 20 NO. 6 2020, pp. 1001-1028, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 1001

2. The adoption of policies and practices that seek to include people, considered different

from traditional ones, in organizations, creating an inclusive culture (Herring, 2009) with

emphasis on gender diversity (Adusei et al., 2017;Garcı

´a-Meca et al., 2018;Owen and

Temesvary, 2018;Rodrı

´guez-Ruiz et al., 2016).

Literature has shown that political connections can impact both positively and negatively

companies’ performance. Indeed, political connections can lead to an increase in sales,

facilitate access to the credit market, with lower interest rates (Su and Fung, 2013), often

providing an informal protection mechanism that affords both a reduction in their

operational risk and an increase in their performance level (Song et al.,2016). However,

firms can use political connections to overinvest because they have easier access to long-

term financing (Ling et al., 2016) and managers with such connections take advantage of

these relationships, in detriment of the collective good (Saeed et al., 2016) and of

shareholders’ interests(Bebchuk and Fried, 2004).

Furthermore, the literature has not yet studied the impact of gender diversity on the

relationship between political connections and performance. On the basis of agency theory,

women, when compared to men, are more likely to monitor management and more diligent

(Kirsch, 2018). Moreover, women are more conservative, more averse to excessive risk-

taking (Palvia et al.,2014) and have more significant ethical concerns (Ku Ismail and Abdul

Manaf, 2016) than men. Thus, the presenceof women on the Boards of Directors conditions

unethical practices, affectingthe profitability of banks and the quality of their assets.

The present paper studies the effect of gender diversity on the relationship b etween political

connections and banking performance, allowing for possible li near and nonlinear relationships

between these variables. So far, to the best of our knowledge, this relationship has not be en

studied. Some studies use moderating effects to explain the relationship between

performance and gender diversity such as the culture or presence of women in management

positions (Adusei et al.,2017;Garcı

´a-Meca et al., 2018). Our research, in addition, also takes

into account the possible simultaneity of the two characteristics of corporate governance

(gender diversity and political connections) and banking performanc e.

In our view, the present text offers several relevant contributions to the existing literature.

Firstly, the paper focusses on the banking sector, which plays an essential role in most

economies at both national and local levels, by contributing to the payment and liquidity

system (Fama, 1985) and by efficiently transforming investment savings (Mayur and

Saravanan, 2017;Pathan and Faff, 2013). Only a stable and robust financial market allows

the resources obtained by banks (deposits/savings) to be allocated to the most productive

projects, thus enabling economic development (Huang et al.,2015), evinced through

subsequent growth of the gross domestic product (GDP) (Jokipii and Monnin, 2013).

Indeed, the development of the financial sector influences the speed and pattern of

countries’ economic development (Levine, 1997). Accordingly, corporate governance

decisions of banks affect not only their performance but also society in general (Garcı

´a-

Meca et al.,2018

). In addition, the banking sector has particular characteristics such as

asymmetric information, that facilitates the concealment of political motivations in lending

decisions and provides moreopportunities for political influence (Dinc, 2005).Moreover, the

banking sector is subject to specific regulations, with significant repercussions on the

composition of its boards (Booth et al., 2002) and on its capital structure (Adams and

Mehran, 2012). Thus, the impact of political connections on banking performance also

effects the economy and financial stability as a whole and it is important to study this

relationship in the banking sector.

Secondly, this study focusses on Eurozone banks whose monetary policy emphasizes

financial stability. Moreover, we investigate a sample of data on 83 banks overseen by the

European Central Bank (ECB) observed over 2013–2017, a period coinciding with two

important ECB measures:

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