Board gender diversity, power, and bank risk taking

Having female board members brings ethical/societal perspectives and new resources to decision making. However, there is lack of evidence on whether it mitigates bank excessive risk-taking; hence, this paper addresses this question. It complements the normative corporate governance literature by combining agency theory and approach/inhibition theory of power from social psychology. For a sample of 195 U.S. commercial banks during 2002-2018, banks invest in more risky assets when female directors perceive the positive rewards of risky investments (in banks that have larger regulatory capital ratios and/or are well-capitalized) and when power shifts away due to CEO equity ownership. On the other hand, banks invest in less risky positions when female directors perceive the penalties inherent in a risky investment during the financial crisis. This paper provides novel evidence on the effect of gender diversity, as a governance mechanism, on risk taking in a social-psychology context. It offers insights on the effect of gender diversity on bank riskiness.