Do Powerful CEOs Determine Microfinance Performance?

Rients Galema, Robert Lensink and Roy Mersland

EconStor Open Access Articles and Book Chapters, 2012, vol. 49, issue 4, 718-742

Abstract: Recently, microfinance has been coming under public and media attacks. The microcredit crisis following from microfinance-induced suicides in 2010 in the Indian state of Andhra Pradesh indicates that weak corporate governance and imprudent risk taking have far-reaching consequences. Yet, analyses of corporate governance mechanisms among microfinance institutions (MFIs) remain underdeveloped. As a response, this study examines the impact of CEO power on MFI risk taking by deriving explicit predictions of this effect from a characterization of the microfinance industry. Based on a sample of 280 microfinance institutions, our results suggest that powerful CEOs of microfinance non-governmental organizations (NGOs) have more decision-making freedom than powerful CEOs of other types of MFIs. This induces them to make more extreme decisions that increase risk. Furthermore, the decision-making freedom powerful CEOs have in NGOs appears to lead to worse decisions, because the presence of powerful CEOs in microfinance NGOs is associated with lower performance.

Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:espost:323975

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