Implications for bank risk when directors are related to minority shareholders

We examine whether directors on a board who are related to minority shareholders have an effect on bank risk. We use a panel of European banks with a controlling shareholder over the period from 2003–2017 and find that these directors result in lower risk. Our results depend crucially on whether or not such directors have reputational concerns or financial expertise, and the level of shareholder protection; the observed decrease in risk does not depend on their position on the board or on the presence of controlling shareholders. To identify the relationship, we use a dynamic generalized method of moments.