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Review of Quantitative Finance and Accounting
Published in: Review of Quantitative Finance and Accounting 1/2022

17-06-2021 | Original Research

Political ideology and CEO performance under crisis

Authors: Katherine Campbell, Cullen F. Goenner, Matthew Notbohm, Adam Smedema

Published in: Review of Quantitative Finance and Accounting | Issue 1/2022

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Abstract

Management quality is known to influence depository institution performance, but less understood are the characteristics of managers that influence performance. We empirically examine how the political ideology of a credit union’s CEO influenced decision making and performance during the financial crisis. Our results indicate that the return on assets of credit unions run by conservative CEOs are 22 basis points lower during the crisis relative to liberal CEOs. Returns are shown to be lower as a direct result of credit unions with conservative CEOs applying more conservative accounting practices for loan losses than their counterparts during the crisis, despite similar loan quality.
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Footnotes
1
Koch and MacDonald (2014) describe a credit culture that maximizes current profits as moderately aggressive and that which maximizes market share as aggressive.
 
2
The other CAMELS components include measures of capital adequacy, asset quality, earnings, liquidity, and sensitivity to market risk. The Office of the Comptroller of the Currency, the FDIC, and the Federal Reserve use all six components in their evaluation of banks, whereas the NCUA applies the first five to credit unions.
 
3
Typical statistical models (e.g., FDIC SCOR model, Federal Reserve FIMS model) used to understand risk exposure control for CAEL (capital adequacy, asset quality, earnings, liquidity); for a discussion of the FDIC’s Statistical CAMELS Off-Site Rating (SCOR) model see Collier et al. (2003), and for more details on the Federal Reserve’s Financial Institutions Monitoring System (FIMS) model see Cole et al. (1995).
 
4
The measure of a CEO’s overconfidence is based on a CEO’s delay in the exercise of deep in-the-money stock options.
 
5
Jost (2006) discusses the history of the use of the term ideology. We adopt a definition of ideology that he describes as “an interrelated set of moral and political attitudes that possess cognitive, affective, and motivational components.”.
 
6
Beltratti and Stulz (2012) is a notable exception in that they find that banks with shareholder-friendly boards performed worse during the crisis. Their sample consisted of 503 banks from thirty-two countries with sixty-three banks from the United States.
 
7
The measure of strength of governance is based on firm-specific factors covering the areas of auditing practices, the board of directors, director education, and executive compensation among others (Brown and Caylor, 2009).
 
8
Credit Union Membership Access Act, Pub. L. No. 105–219 (1998). Members each have an equal vote regardless of their level of deposits.
 
9
For example, credit unions are limited in their exposure to risk taking with off-balance sheet activities, as credit unions, unlike banks, are unable to act as dealers for over the counter swaps.
 
10
Hutton et al. (2014) also use the September 2008 Lehman Brothers bankruptcy as a natural experiment to evaluate investment behavior of conservative managers due to the increase in uncertainty of future economic policy.
 
11
Davidson et al. (2015) find that different characteristics of CEOs may have an effect on fraudulent practices at their firm via either channel. CEOs convicted of prior legal infractions are also more likely to commit fraud at their firm, while there is no effect on other employees’ behavior (propensity channel). Firms run by “unfrugal” CEOs though are more likely to have employees who commit fraud, despite their being no difference in CEO’s behavior in this regard (corporate channel).
 
12
Practitioner articles include references to the importance of credit union CEOs in shaping the credit union’s culture. Examples of these include “If the (credit union’s) culture is not being led by the CEO with strong support from the head of HR, it may be time to hit the reset button.” (Shanley, https://​www.​jmfa.​com/​News-Events/​Articles-Posts/​does-your-credit-union-really-have-a-member-centric-culture), and “When Harbin took the helm (of Commonwealth Credit Union) in early 2012, she had her eyes set on creating a culture…” (Simpson, https://​www.​creditunions.​com/​articles/​how-to-foster-a-new-culture-across-the-credit-union/​).
 
14
See 52 U.S.C. § 30,104. Prior to 1989, contributions of $500 or more were required to be reported https://​www.​fec.​gov/​campaign-finance-data/​contributions-individuals-file-description/​.
 
15
We used a combination of SASs fuzzy matching and manual reviews. Many matches were a perfect match and for those that were not (typically involving abbreviations), we conducted a manual review to find the matching credit union and eliminate cases that contained the relevant strings but were not credit unions.
 
16
We impose this restriction on previous employment as it is impossible for us to identify whether individuals with the same name, but a different employer in an earlier period are the same contributors in question. The contributor in an earlier period is not necessarily the CEO.
 
17
This is significantly less than the 29% of mutual fund managers (Hong and Kostovetsky 2012) and the 70% of managers of firms in the Russell 3000 (Di Giuli and Kostovetsky 2014) that made partisan contributions. Compensation of credit union CEOs though is significantly lower than these other managers. The median total compensation for credit union CEOs was $176,371 in 2008 (Bankston 2008), whereas median compensation of fund (equity) managers was $456,000 in 2007 (CFA Institute 2007), and median compensation was 2,885,000 for CEOs of the Russell 3000 in 2010 (Tonello and Reda 2015).
 
19
Di Giuli and Kostovetsky (2014) find a similar pattern of exclusive giving among CEOs of firms in the Russell 3000.
 
20
Others (Di Giuli and Kostovetsky 2014; Hutton et al. 2014) have used a continuous measure of ideology based on the pattern of giving. We chose to use an indicator-based measure of ideology (Hong and Kostovetsky 2012) given that 83% of our CEOs gave exclusively to one party and those who did not had strong partisan giving. This also avoids the need to arbitrarily code the ideology of CEOs that do not give—the vast majority of our CEOs.
 
21
The normalized difference for covariate Xk is equal to \(\Delta _{{X,k}} = \frac{{\bar{X}_{{cons,k}} - \bar{X}_{{non - cons,k}} }}{{\sqrt {\left( {S_{{X,cons,k}}^{2} + S_{{X,non-cons,k}}^{2} } \right)/2} }}\) where we have the difference in the mean of covariate Xk between conservative and liberal credit unions in the numerator and their standard deviations in the denominator.
 
22
Navy Federal Credit Union is systemically relevant with $73 billion in assets as of December 2015.
 
23
We also considered, similar to Ely (2014), whether the local banking environment had an impact on performance and found inclusion of a Herfindahl–Hirschman Index of deposit concentration and/or measure of local deposits were never statistically significant in any of our specifications.
 
24
One could also view this as a falsification test, i.e., if we believe conservative credit unions only behave differently under crisis than using the periods in which there wasn’t a crisis we should find there to be no observed effect.
 
25
The match is based on minimizing the standardized Euclidean distance between two vectors of covariates.
 
26
Results for each of the statistically insignificant items not reported are available upon request.
 
27
Beatty et al. (2002) and Cohen et al. (2014) include in their specifications of provisions for loan losses by banks: size, the change in nonperforming loans, lagged allowances, various asset categories, and region indicators.
 
28
We do not report the results from the first stage. A complete table of results is available upon request.
 
29
We thank an anonymous referee for their suggestion.
 
30
Call report data does not provide management information beyond the CEO and the President of the board. It is not possible to uniquely match the President’s name with the FEC data based on their name alone, as this requires either their employment or address and neither are available.
 
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Metadata
Title
Political ideology and CEO performance under crisis
Authors
Katherine Campbell
Cullen F. Goenner
Matthew Notbohm
Adam Smedema
Publication date
17-06-2021
Publisher
Springer US
Published in
Review of Quantitative Finance and Accounting / Issue 1/2022
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI
https://doi.org/10.1007/s11156-021-00996-z

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