Competition and Agency Problems Within Banks: Evidence from Insider Lending

Girotti, Mattia; Salvadè, Federica

doi:10.1287/mnsc.2021.4043

Cited by 10 publications

(4 citation statements)

References 45 publications

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“…The agency theory has been widely used in banking research to explain excessive risk-taking behavior by bank managers for speculation, hedging, competition and incentives (Boyd and DE Nicoló, 2005; Girotti & Salvadè, 2022; Minhat & Abdullah, 2016). Using the lens of the agency theory, Galdi, De Moura, and França (2021) explained earnings management in Brazilian banks using LLPs, while AlQudah, Azzam, Haija, and AlSmadi (2020) explained the monitoring role of diverse ownership structures in mitigating earnings management in Jordanian banks.…”

Section: Background and Hypothesis Developmentmentioning

confidence: 99%

Loan loss provisions and income smoothing in banks: the role of trade openness and IFRS in BRICS

Biswas,

Bhattacharya,

Jin

et al. 2024

CAFR

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PurposeThis paper empirically investigates whether trade openness (TO) in Brazil, Russia, India, China and South Africa (BRICS) countries affects how banks might employ loan loss provisions (LLPs) to smooth out their earnings and how adopting the International Financial Reporting Standards (IFRS) can mitigate it.Design/methodology/approachThe analysis includes 78 commercial banks from five BRICS nations and spans 2014 through 2020. To test these hypotheses, the authors utilized a fixed-effect and two-step system panel generalized methods of moments (GMM) estimator.FindingsTO positively affects income smoothing (earnings management) across BRICS commercial banks. The effect is clearer in banks that make financial reports under the IFRS. Path analysis reveals that the effect of TO is driven by nonperforming loans (NPLs). Additionally, the IFRS restricts earnings management in the BRICS banking sector when a better institutional environment is present. The authors found that accounting rules (IFRS) and enforcement (better institutional settings) interact to enhance earnings’ quality.Practical implicationsThe relationship between TO and bank earnings management practices is important for understanding the complex interplay between trade and finance and ensuring financial stability, investor confidence and regulatory compliance. This study recommends better regulations and governance mechanisms for financial reports in emerging nations like BRICS. Additionally, macro-prudential regulators and banking supervisors should work closely to ensure transparent TO decisions with improved discipline, institutional quality and regulatory support to enhance bank stability.Originality/valueThe study finds evidence of bank income smoothing in the BRICS and introduces TO as a determinant. It also identifies the evolving role of IFRS in the presence of higher institutional quality and TO, thereby expanding the financial reporting literature.

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Section: Background and Hypothesis Developmentmentioning

confidence: 99%

Loan loss provisions and income smoothing in banks: the role of trade openness and IFRS in BRICS

Biswas,

Bhattacharya,

Jin

et al. 2024

CAFR

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“…Jensen and Meckling (1976) posited that managers are willing to embark on a growth strategy by increasing risk, but shareholders wish to minimize risk to protect their stock from declining in value. In the case of the banking sector, agency problems exist between shareholders and bank managers (Girotti and Salvadè 2021). Girotti and Salvadè (2021) proxied agency conflicts in banks by giving insiders preferences in obtaining loans.…”

Section: Hypotheses and Conceptual Model Developmentmentioning

confidence: 99%

“…In the case of the banking sector, agency problems exist between shareholders and bank managers (Girotti and Salvadè 2021). Girotti and Salvadè (2021) proxied agency conflicts in banks by giving insiders preferences in obtaining loans. Alternatively, managers of banks may take risky decisions to increase their private benefits.…”

Section: Hypotheses and Conceptual Model Developmentmentioning

confidence: 99%

The Impact of Corporate Governance and Political Connectedness on the Financial Performance of Lebanese Banks during the Financial Crisis of 2019–2021

El-Chaarani

Abraham

2022

JRFM

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The Lebanese banking sector has become risky due to political and economic crises. At such times, corporate governance mechanisms ensure objectivity of assessment and rationality in decision making. We examine the impact of internal corporate governance mechanisms on the performance of Lebanese banks, with political involvement in the administration and ownership of the banks. We used linear regression on a sample of 194 bank-year observations from 2016 to 2021. The presence of independent members on boards of directors, and ownership concentration due to family ownership, had positive effects on bank return on assets, return on equity, liquidity levels, and loans issued. Efficient control, along with the presence of audit, and compliance committees reduced risk by increasing capital adequacy and reducing non-performing loans. Both administrative political connections and ownership political connections increased return on assets, increased return on equity, increased liquidity levels, and increased loans to deposits, while increasing non-performing loans. Agency conflicts suggest that granting loans due to political pressure increased non-performing loans.

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“…Girotti and Salvadè (2022) show an important positive feature of bank competition: a reduction on managerial self-dealing due higher competition.…”

mentioning

confidence: 99%

Decentralized Market Power in Credit Markets

Christiano¹,

Souza²,

Guerra³

et al. 2023

Preprint

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Competition and Agency Problems Within Banks: Evidence from Insider Lending

Cited by 10 publications

References 45 publications

Loan loss provisions and income smoothing in banks: the role of trade openness and IFRS in BRICS

Loan loss provisions and income smoothing in banks: the role of trade openness and IFRS in BRICS

The Impact of Corporate Governance and Political Connectedness on the Financial Performance of Lebanese Banks during the Financial Crisis of 2019–2021

Decentralized Market Power in Credit Markets

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