Three essays on CEO expertise power and bank strategic decisions : A thesis submitted in partial fulfilment of the requirements for the Degree of Doctor of Philosophy at Lincoln University

Abstract

A CEO's expertise power is a combination of a CEO’s educational background, career path and experience, which influences the critical components of the bank task environment, e.g., bank diversification, bank lending and other financial services, thus, needing a close attention to investigate the CEO’s expertise power and bank key decisions. This thesis comprises three essays on a chief executive officer’s (CEO’s) expertise power and bank strategic decisions using US commercial banks data from 1990-2020. The first essay examines the effect of a CEO’s expertise power on bank diversification. The results show that a CEO's expertise power is positively associated with bank diversification. Market competition and board composition (size and independence) positively moderate this relationship. The results also show that CEO delta and vega are the underlying mechanisms through which expertise power leads to higher diversification. I address endogeneity concerns using the two-stage least squares, Heckman estimation and the Differences-in-Differences approaches and check robustness in several ways. The second essay examines the effect of a CEO’s expertise power on bank lending growth. The result reveals that a CEO's expertise power is positively associated with bank loan growth. Further, the result shows that GDP growth, board size and gender diversity positively and financial crises negatively affect this relationship. In channel analyses, I find that bank opacity (information asymmetry) and CEO delta (CEO pay-performance sensitivity) are the underlying mechanisms through which the CEO’s expertise power is associated with loan growth. I address endogeneity concerns using the fixed effects, generalized method of moments (GMM) and Heckman's two-stage approaches. The third and final essay examines the effect of CEO expertise power on bank tax avoidance. The result shows that a CEO's expertise power is positively associated with bank tax avoidance. The result also finds that diversification and gender diversity negatively and board size and financial crises positively affect this relationship. In channel analyses, the result reveals that CEO delta and vega are the underlying mechanisms through which the CEO’s expertise power is associated with bank tax avoidance. I address endogeneity concerns using the fixed effects, generalized method of moments (GMM), Differences-in-Differences (DID) and Heckman's two-stage approaches. This study enhances the scope of upper echelon theory by examining the implications of CEO characteristics (expertise power) for bank diversification, loan growth and tax avoidance decisions. This study provides a new explanation for bank diversification, loan growth and tax avoidance that will be useful for policymakers in developing bank strategy for CEO appointment that affects bank decisions. This study has several managerial and practical implications. The findings show that expert CEOs are highly skilled managers who can efficiently manage bank risk and other challenges, such as financial crises, reduce bank information asymmetry that improves bank lending, improve bank risk management and performance that generate more cash flows. Thus, CEO expertise contributes to bank stability by making value enhancing decisions.