Banks' risk, political connection and foreign directorship

Purpose The purpose of the paper is to examine the political connection and foreign directorship of the board of directors of the Bahraini banks on the risk between 2015 and 2019 exploiting the GCC diplomatic crisis as an exogenous shock. Design/methodology/approach This paper uses the difference-in-difference (DID) method to investigate the causal effect of political connection on the banks' risk in Bahrain exploiting the recent regional crisis using a unique manually collected data about political connection in all Bahraini banks from 2015 to 2019. Findings The paper finds strong evidence of a significant positive relationship between banks' risks and political connection which increases dramatically after the crisis. Additionally, the study shows that foreign directors increase the efficiency of the board of directors. Research limitations/implications Government policymakers, economists, and investors could have taken precautionary actions to mitigate risk, particularly during times of crisis. The 2017 GCC diplomatic crisis disrupted Bahrain's economy and increased investors' perceptions of political risk across the Gulf as a whole. Originality/value Firstly, limited attention has been given to issues of diversity and political connections, particularly in the Gulf countries. Secondly, the study focuses on Bahrain, a developing country with distinct economic, legal, and cultural environments that warrant investigation. Moreover, it examines political connections within boards of directors and their effect on banks' risk. Finally, this study extends the literature by providing evidence on the effect of foreign directorship on banks' risk.