This paper investigates whether gender-diverse bank boards can play a role in preventing costly misconduct episodes. We exploit the fines received by European banks from US regulators to reduce endogeneity issues related to supervisory and governance mechanisms. We show that greater female representation significantly reduces the frequency of misconduct fines, equivalent to savings of $7.48 million per year. Female directors are more influential when they reach a critical mass and are supported by women in leadership roles. The mechanism through which gender diversity affects board effectiveness in preventing misconduct stems from the ethicality and risk aversion of the female directors, rather than their contribution to diversity. The findings are robust to alternative model specifications, proxies for gender diversity, reverse causality, country and bank controls, and sub-sample analyses

We analyze whether price fixing firms modify their Corporate Social Responsibility (CSR) activities around the revelation of the corporate misconduct. Our paper is the first empirical study to specifically explore the timing and the stability of the new CSR investments in firms involved in corporate misconduct. Our results show that firms that participate in illegal price fixing schemes increase their CSR initiatives around the time when they become the target of an antitrust investigation - not before. Moreover, the new CSR initiatives are mainly concentrated on improving positive CSR rather than in reducing further CSR concerns. Finally, we show that the new CSR efforts are not only associated with lower fines. We find that colluding firms tend to lose sales following a cartel breakup, although the decline in sales is less pronounced for those cartel firms that take anticipatory CSR actions to limit the negative impact of fraud revelation

This article synthesizes the large literature regarding the role of various players in residential mortgage-backed securities (RMBS) securitization at the center of the 2008–09 US housing and financial crisis. Underwriting banks facilitated wide-scale mortgage fraud by knowingly misreporting key loan characteristics underlying mortgage-backed securities (MBS). Under the cover of complexity, credit rating agencies catered to investment banks by issuing increasingly inflated ratings on both RMBS and collateralized debt obligations (CDOs). Originators who engaged in mortgage fraud gained market share, as did CDO managers who catered to underwriters by accepting the lowest-quality MBS collateral. Appraisal targeting and inflated appraisals were the norm. RMBS and CDO prices indicate that the marginal AAA investor was unaware of pervasive mortgage fraud and ratings inflation, but these factors were strongly related to future deal performance. The supply of fraudulent credit was not uniform, but clustered in certain geographic regions and zip codes. As these dubious originators extended credit to those who could not afford the loans, the credit expansion led to house price booms and subsequent crashes in these zip codes. Overall, a consistent narrative based on substantial research indicates that conflicts of interest, misreporting, and fraud were focal features of the financial crisis

The incidence of misselling, fraud, and poor customer service by retail banks is significantly higher in areas with higher proportions of poor and minority borrowers and in areas where government regulation promotes an increased quantity of lending. Specifically, low-to-moderate-income (LMI) areas targeted by the Community Reinvestment Act have significantly worse outcomes, and this effect is larger for LMI areas with a high-minority population share. The results highlight an unintended adverse consequence of such quantity-focused regulations on the quality of credit to lower-income and minority customers