Corporate Governance and Performance in the Wake of the Financial Crisis: Evidence from US Commercial Banks

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: Does corporate governance explain US bank performance during the period leading up to the financial crisis? We adopt the factor structure by Larcker, Richardson, and Tuna (2007) to measure multiple dimensions of corporate governance for 236 public commercial banks. Research Findings/Insights: Findings reveal corporate governance factors explain financial performance better than loan quality. We find strong support for a negative association between leverage and both financial performance and loan quality. CEO duality is negatively associated with financial performance. The extent of executive incentive pay is positively associated with financial performance but exhibits a negative association with loan quality in the long-run. We find a concave relationship between financial performance and both board size and average director age. We provide weak evidence of an association of anti-takeover devices, board meeting frequency, and affiliated nature of committees with financial performance. Theoretical/Academic Implications: We apply agency theory to the banking industry and expect that the governanceperformance linkage might differ due to the unique regulatory and business environment. Results extend Larcker et al. (2007), especially regarding the concave relationship between board size and performance, and the role of leverage. Given the lack of support for our agency theory predictions, we suggest that alternative theories are needed to understand the performance implications of corporate governance at banks. Practitioner/Policy Implications: We offer contributions to regulators, especially for ongoing financial reforms of capital requirements and executive compensation. Specifically, we show a consistent negative association between leverage and performance, which supports the current debate on Tier I capital limits for banks.

Corporate Governance and Corporate Social Responsibility Disclosure: Evidence from the US Banking Sector

“…Since the credit crunch of [2007][2008], stakeholders' perceptions of firms' risk and performance have become particularly important to banks' sustainability, since they rely on depositors and government agencies as key sources for funding and liquidity (Grove et al, 2011;Veronesi and Zingales, 2010), and as investors have become increasingly risk averse (Gemmill and Keswani, 2011). However, there is a distinct lack of empirical research into the relationship between corporate governance and CSR in the banking sector.…”

“…As commercial banks are complex organisations that are subject to wide-ranging regulation (Grove et al, 2011), we expect that in this context workload considerations are of ultimate importance. Hence, we expect that larger boards will be better able to direct management to engage in CSR activities and to effectively communicate their social performance to the bank's stakeholders.…”

“…This is one of the reasons why industries, which can impose significant negative external effects on society, such as the financial service sector, tend to be comparatively tightly regulated and scrutinised. The huge negative external effects failing banks in the US and Europe recently imposed on society are the driving force behind attempts by national and international regulators to improve banking standards and explain why the CSR activities of banks have come under increased public scrutiny (Grove et al, 2011).…”

“…Financial institutions, in particular banks, have come under increasing pressure since the subprime mortgage crisis and the following credit crunch to take a more long-term view of their investors' business interests and to acknowledge and respond to their obligations to society (Matten, 2006;Money and Schepers, 2007;Gill, 2008;Grove, Patelli, Victoravich and Xu, 2011). Due to the extensive negative external effects poorly managed and controlled banks can impose on society, the perception of the firms' corporate social responsibility (CSR) activities is important not only for investors' and customers' risk assessment, but also for regulators' good-will and for the public's confidence in the financial system.…”

Bank Ownership, Board Characteristics and Performance: Evidence from Commercial Banks in India

“…The link between bank governance and asset quality particularly came into focus following the financial crisis of 2008 as non-performing loans were considered as one of the major factors that precipitated the financial crisis (Reinhart and Rogoff 2010). Accordingly, several studies around that time focused on estimating the effect of corporate governance on asset quality (Grove et al 2011;Liang et al 2013;O'Sullivan et al 2016). In keeping with extant literature (García-Herrero et al 2009;Liang et al 2013), we use (i) net non-performing assets to total loans and advances (Nnpa_ttladv); (ii) gross non-performing assets to total loans and advances (Gnpa_ttladv); (iii) addition of net non-performing assets to total loans and advances (Nnpa_additn_ttladv) and (iv) addition of gross non-performing assets to total loans and advances (Gnpa_additn_ttladv) as our measures of asset quality.…”