Does bank stakeholder orientation enhance financial stability?

Abstract

Using the staggered enactment of constituency statutes across US states, we find that banks with directors whose legal duties are expanded to consider stakeholder and long-term interests significantly reduce risktaking by increasing capital and shifting to safer borrowers. Additionally, we find that the effect of statute enactment on bank performance is insignificant on average but significantly positive for banks that take excessive risk. Furthermore, we find that banks that previously received a statute enactment fared significantly better during the crises. Our findings support the increasing calls for greater emphasis on stakeholder interests amidst the current bank regulatory and governance reforms.

Do ESG strategies enhance bank stability during financial turmoil? Evidence from Europe

“…However, unlike Anginer et al (2018), our evidence suggests that improved corporate governance seems to provide benefits in terms of stability. Our results are therefore in line with literature exploring the link between stakeholder-oriented governance and bank stability (Dell'Atti et al 2017;Leung, Song, and Chen 2019).…”

“…The latter document how a shareholder-friendly governance increases both stand-alone and systemic risks in banks, and this behaviour is different than in non-financial firms due to the presence of explicit and implicit safety nets. Similarly, a greater shareholder orientation seems to be associated with greater losses during the crisis (Beltratti and Stulz 2012;Leung, Song, and Chen 2019). Mollah and Liljeblom (2016) find that banks with more powerful CEOs performed better and reduced their asset risk during the sovereign debt crisis than during the credit crisis, despite accepting higher insolvency risk.…”

Stakeholder Orientation and the Cost of Debt: Evidence from State-Level Adoption of Constituency Statutes

“…The permutation p-value is then calculated as the proportion of the re-randomizations for which the coefficient estimate (t-statistic) is more extreme in absolute value than that from the regression of interest. 20 The eight papers are Geczy et al (2015), Flammer andKacperczyk (2016), Flammer (2018), Radhakrishnan, Wang, and Wang (2018), Cremers, Guernsey, and Sepe (2019), Flammer, Hong, and Minor (2019, Leung et al (2019), and Nguyen, Kecskés, and Mansi (2020). firms incorporated in states without such statutes.…”

“…To the best of our knowledge, there are only eight articles (in addition to ours) that examine the effect of constituency statutes in a difference-in-differences setting. 20 Even within those eight articles, some are based on a sample of banks (Leung, Song, and Chen (2019)) or financial institutions (Geczy et al (2015)) and do not employ the same sample as ours. Heath et al ((2019), Table 1) show that when a natural experiment is reused for fewer than 10 times (as in our application), the possibility of false discoveries is negligible.…”

The role of bank affiliation in bank efficiency: a fuzzy multi-objective data envelopment analysis approach

“…In all regressions shown in Table 3, the interaction term between 𝑇𝑟𝑒𝑎𝑡 𝑖 and 𝑃𝑜𝑠𝑡 𝑖 is positively and statistically significant at the 1% threshold level, implying that single-BHC affiliates tend to increase their efficiency after switching to multi-BHC affiliates compared to single-BHC affiliates that keep the same status. 4 We follow Leung et al (2019) to apply a dynamic treatment method with this sample to see how the difference between treated banks and non-treated banks changes over different periods based on the following equation: where 𝐵𝑒𝑓𝑜𝑟𝑒 𝑖𝑡 −2 𝑜𝑟−1 is a dummy variable that is equal to 1 for each of the two years before banks switch from single-BHC affiliate to multi-BHC affiliate. 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑖𝑡 0 is a dummy variable that is equal to 1 for the year when banks switch their status.…”