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Corporate Governance in the 2007-2008 Financial Crisis: Evidence from Financial Institutions Worldwide

David Hendrik Erkens, University of Southern California
Mingyi Hung, University of Southern California
Pedro Matos, University of Southern California

ABSTRACT: This paper investigates the role of corporate governance in the 2007-2008 financial crisis, using a unique dataset of 296 financial firms from 30 countries that were at the center of the crisis. Paradoxically, we find that while boards and shareholders appear to have executed their monitoring role by replacing poorly performing CEOs during the crisis, they also seem to have encouraged investments in subprime mortgage related assets that led to large losses during the crisis. Overall our results are inconsistent with the losses during the financial crisis being the result of lax oversight by boards and investors. Rather, our results are consistent with risk-taking encouraged by shareholders and reputational concerns of directors having contributed to the losses.

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