Are two heads better than one? Evidence from the thrift crisis

We employ a natural experiment from the 1980s, predating the ubiquitous clamor for independence influenced corporate governance structures, to examine which governance mechanisms are associated with firm survival and failure. We find that thrifts were more likely to survive the thrift crisis when their CEO also chaired the firm’s board of directors. On average, chair-holding CEOs undertook less aggressive lending policies than their counterparts who did not chair their boards. Consequently, taxpayer interests were protected by thrifts that bestowed both leadership posts to one person. This is an important policy issue, because taxpayers become the residual claimants for depository institutions that fail as a result of managers adopting risky strategies to exploit underpriced deposit insurance. Our findings corroborate recent evidence that manager-dominated firms resist shareholder pressure to adopt riskier investment strategies to exploit underpriced deposit insurance.