The impact of board structure on bank loan herding via mediation of underperformance

Abstract

ABSTRACT When weak governance practices cause poor bank lending performance, banks are more likely to engage in ‘loan herding’ to avoid a sustained performance deterioration. Using the three main types of Chinese banks as our sample, this study first confirms the existence of loan herding and the positive effects of a weak board structure on poor lending performance (i.e. underperformance). Then, after finding positive impacts of this underperformance on loan herding, we examine whether board structure variables negatively affect loan herding. We find that higher director compensation, a moderate average age of directors, and higher director education levels significantly reduce bank loan herding, whereas board duality and the presence of very old directors significantly increase bank loan herding. Finally, we study the mediation effect of loan performance on the relationship between board structure and loan herding. Our results show that board governance quality affects loan performance, which, in turn, affects loan herding.