Corporate governance and financial stability in US banks: Do indirect interlocks matter?

Abstract

In the context of the Depository Institution Management Interlocks Act of 1978 (Interlocks Act), we investigate the structure and implications of the professional connections among bank directors. Based on a hand-collected unique dataset for a sample of 168 US commercial banks listed continuously from 2009 to 2015, we find that the barriers set out in the Interlocks Act have been circumvented by the establishment of indirect interlocks that allow for mass professional connections among bank directors. Our evidence suggests that bank wellconnectedness through indirect interlocks has a significant impact on financial stability. In particular, we find, in support of the extended resource-based view (RBV), that well-connected banks mitigate their credit and insolvency risks but, contrary to our expectation, lower bank capitalisation. Our evidence suggests that the Interlocks Act and bank governance reforms need to consider the role of professional communications among bank directors to fully achieve their intended goals.

Gender Diversity and Financial Stability: Evidence from Malaysian Listed Firms

“…Indeed, the small number of women directors on the AC as well as the need to improve their effectiveness are the major reasons for their low monitoring role (Salleh & Haat, 2013). This result is inconsistent with agency and resource dependence theories, as well as, the findings of several studies in developed countries such as Gavious et al (2012), Gul et al (2007), Thiruvadi andHuang (2011), andZalata et al (2018), and a few studies in Malaysia such as Ku Ismail and Abdullah (2013) and Salleh et al (2012), which found a negative relationship between women directors on the AC and EM; that is, women on the AC significantly enhance the quality of financial reporting.…”

“…Hence, they may strengthen the monitoring role of the AC in improving the quality of earnings and financial reporting, aligning with the theories of agency and resource dependence. Most previous studies such as Gavious et al (2012), Gul et al (2007), Thiruvadi andHuang (2011) Zalata, Tauringana, andTingbani (2018) have concluded that, in developed countries, women on the AC positively influence the quality of financial reporting, measured by EM. Similarly, studies by Ku Ismail and Abdullah (2013), Salleh, Hashim, andMohamad (2012), andZalata, Tauringana, andTingbani (2018) have concluded that, in Malaysia, women on the AC positively influence the quality of financial reporting, measured by EM.…”

“…The role of CG, like the board of directors, has been studied extensively (Abdelbadie & Salama, 2019). Earlier researchers have examined in-depth the effect of CG in respect of financial reporting quality, for instance, earnings management (EM), timely financial reporting, and firm performance.…”

“…Most policy decision-makers have questioned the extent to which managerial dominance and the inability of boards to supervise executives might have led to unwarranted risk-taking and financial instability (Anginer et al, 2018). It is argued that weak firm performance and high risk contribute significantly to financial instability; they are the negative consequences of board failure in performing the assigned tasks efficiently (Abdelbadie & Salama, 2019).…”

Capital and Liquidity Risks and Financial Stability: Pre, During and Post Financial Crisis Between Islamic and Conventional Banks in GCC Countries, in the Light of Oil Prices Decline

“…It is also reported that low liquidity has a significant and negative effect on bank compliance to rule and regulations that have proposed by Basel III. So, the bank would comply less to hold high ratio of capital as required, once attract more deposits and grant more loans, which means more illiquid assets (Abdelbadie & Salama, 2019).…”