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Board of Diretor Education and Firm Performance: A Dynamic Approach

-Abstract I examine the relationship between board of director’s (BoD) education and firm
performance on a European dataset over the period from 1999 to 2013, employing a
well-developed dynamic panel generalized method of moments (GMM) estimator to
alleviate endogeneity issue in corporate governance study. I find no correlation between
BoD education and firm’s return on asset, after accounting for endogeneity issues. All else
equal, firms with better educated board of director may appear to have better performance
in the shortrun, but that superiority will likely to reverse in the future.

Board members' education and firm performance: evidence from a developing



Salim Darmadi (Indonesian Financial Services Authority (OJK), Jakarta, Indonesia and
Indonesian College of State Accountancy (STAN), Tangerang Selatan, Indonesia)

– This study provides empirical evidence that the educational qualifications of board
members and the CEO matter, to a particular extent, in explaining either ROA or
Tobin's Q. For example, CEOs holding degrees from prestigious domestic universities
perform significantly better than those without such qualifications.

Practical implications
– Even though intellectual competence should appear to be one of the considerations
in the appointment of board members, educational qualification is not always a good
proxy for superior advising or managerial quality. There may be many other factors that
need to be considered, such as experiences, managerial skills, networks, and other skills
obtained outside schools. As such, the establishment of a nomination committee, which
is expected to provide independent recommendations on qualified candidates to serve
in the boardrooms, plays an important role.
Board of Diretor Education and Firm Performance: A

Dynamic Approach

Second, we show that these two types of banks are quite different in terms of their
boards’ characteristics, as cooperative banks have lower board turnover and educational
levels than joint-stock banks, both traits that are commonly considered to indicate weak
governance. Our third result shows that cooperative banks’ lower risk-taking is driven by
the lower educational level of directors on the board, which is also confirmed when using a
sample consisting solely of cooperative banks and when excluding listed banks. Notably, the
result is not confirmed for credit risk-taking, but only for measures of total risk. A
comprehensive interpretation of these results leads to the conclusion that in cooperative
banks a lower level of board members’ education leads to a lower exposure to total risk
and in turn to more stable performance when risks materialize systemically as in a crisis.
However, for “core” risk the competences and experience accumulated within the
organization may be more relevant than those of the board. Indeed, for credit risk while we
expect that the risk appetite is defined at board-level, the actual exposure depends on the
abilities in handling the relationship with customers/borrowers and/or to assess their
creditworthiness (in small cooperative banks we expect that these abilities are more
effective given the closeness of the relationship with customers and the great deal of soft