Corporate governance, financial distress, and risk-taking in the USA banking sector

This thesis investigates the role of corporate governance in US bank holding companies between 1998 to 2007. In the course of the thesis, four main contributions to extant literature are brought to the fore. First, the research facilitates a better understanding of the link between corporate governance and risk-taking. This is the main focus of the thesis and so this strand permeates the entire text. Second, it constructs a distance-to-default indicator, which is used to predict and compare financial conditions in banks that issued subordinated debt with those that did not. Third, it considers the impact of managerial incentives on bank risk-taking through board structure. Finally, the results provide a platform from which to view the various policy implications raised by the thesis. In analysing the extent to which distance to default is explained by bank risk fundamentals, it is shown that distance to default is predicted marginally better in sub-debt banks relative to non-sub-debt banks. For banks that issue sub-debts, again, it is found that charter values and bank capitalisation further increase the power of bank fundamentals to predict default risk. Turning to bank risk-related variables, capital to assets and non-performing loan ratios negatively and positively affect managerial ownership, respectively. This evidence is new. The percentage of independent directors is positively related to capital to asset and liquid asset ratios, and negatively related to the non-performing loans ratio. Capital to assets and non-performing loan ratios have an observed positive and negative correlation with the percentage of institutional ownership. Also, excessive risk-taking is evident in ex-ante and ex-post Sarbanes and Regulation and linked to board size. With respect to managerial incentives, equity- and cash-based compensation is positively related to bank risk. Finally, while leverage varies directly with stock options, it is inversely associated with cash compensation

Corporate governance in banks: systematic literature review and meta-analysis

This paper provides a two steps investigation of the literature on banking corporate governance. We firstly perform a systematic literature review on the academics papers focused on risk management, compensation and ownership structure of banks. Then we run a meta-analysis investigation over more than 2,500 observations to clarify the understanding of the relationship with performance and risk in banks. The sub-group analysis related with bank performance shows a clear and significant finding: Board ownership, CEO ownership and Controlling shareholder enhance the performance of banks. Conversely, State ownership is negatively associated with bank performance. Results of the whole investigation and directions for scholars are also discussed

Board composition, monitoring and credit risk: evidence from the UK banking industry

This paper examines the effects of board composition and monitoring on the credit risk in the UK banking sector. The study finds CEO duality, pay and board independence to have a positive and significant effect on credit risk of the UK banks. However, board size and women on board have a negative and significant influence on credit risk. Further analysis using sub-samples divided into pre-financial crisis, during the financial crisis and post crisis reinforce the robustness of our findings. Overall, the paper sheds light on the effectiveness of the within-firm monitoring arrangement, particularly, the effects of CEO power and board independence on credit risk decisions thereby contributing to the agency theory

Investment opportunity set, product mix, and the relationship between bank CEO compensation and risk-taking

The product mix changes that have occurred in banking organizations during the 1990s provide a natural experiment for investigating how firms adjust their executive compensation contracts as their mix of businesses changes. Deregulation and new technology have eroded banking organizations’ comparative advantages and have made it easier for nonbank competitors to enter banking organizations’ lending and deposit-taking businesses. In response, banking organizations have shifted their sale mix toward noninterest income by engaging in municipal revenue bond underwriting, commercial paper underwriting, discount brokering, managing and advising open- and close-ended mutual funds, underwriting mortgage-backed securities, selling and underwriting various forms of insurance products, selling annuities, and other investment banking activities via Section 20 subsidiaries. These mix changes could affect firms’ risk and the structure of CEO compensation. The authors find that as the average banking organization tilts its product mix toward fee-based activities and away from traditional activities, equity-based compensation increases. They also find that more risky banks have significantly higher levels of equity-based compensation, as do banks with more investment opportunities. But, more levered banks do not have higher levels of equity-based CEO compensation. Finally, the authors observe that equity-based compensation is more important after the Riegle-Neal Act of 1994.

Impact of ownership structure and ownership concentration on credit risk of Chinese commercial banks

The file attached to this record is the author's final peer reviewed version. The Publisher's final version can be found by following the DOI link.Purpose- The purpose of this study is to examine the effects of bank ownership structure and ownership concentration on credit risk. Design/methodology/approach- Using panel data on a sample of 88 Chinese commercial banks with 1194 observations over a period of 2003-2018, this study employs system generalised method of moments regression to examine the impact of bank ownership structure and ownership concentration on credit risk. Two measures of credit risk, namely, non-performing loan ratio and loan loss provision ratio are used to ensure the robustness of the results. Findings– The results show that ownership type (both government and private ownership) exert positive and significant impact on credit risk. However, our results indicate that concentration of ownership in the hands of government has negative and significant effect on credit risk while private ownership concentration positively impacts on credit risk. Overall our findings suggest that concentration of ownership in government hands reduces risk, whilst private ownership concentration exacerbates credit risks. Our results are invariant to alternative measures of credit risk and financial crisis. Practical implications – The findings provide useful insight to guide policy decisions in Chinese banks’ lending policies and bank ownership. Originality/value– Using hand collected data on ownership structure and governance from annual reports this study deepens our understanding on the effectiveness of Chinese banks’ corporate governance reforms on managing credit risks

Deregulation and the relationship between bank CEO compensation and risk taking

The deregulation of the banking industry during the 1990s provides a natural (public policy) experiment for investigating how firms adjust their executive compensation contracts as the environment in which they operate becomes relatively more competitive. Using the Riegle-Neal Act of 1994 as a focal point, we investigate how banks changed the equity-based component of bank CEO compensation contracts. We also examine the relationships between equity- based compensation and risk, capital structure, and investment opportunity set. Consistent with theoretical predictions, we find that after deregulation, the equity- based component of bank CEO compensation increases significantly on average for the industry. Additionally, we find that more risky banks have significantly higher levels of equity-based compensation, as do banks with more investment opportunities. But, more levered banks do not have higher levels of equity-based CEO compensation. Finally, we observe that most of these relationships become more powerful in our post- deregulation period.Corporate governance ; Bank supervision

Executive compensation and business policy choices at U.S. commercial banks

This study examines whether and how the terms of CEO compensation contracts at large commercial banks between 1994 and 2006 influenced, or were influenced by, the risky business policy decisions made by these firms. We find strong evidence that bank CEOs responded to contractual risk-taking incentives by taking more risk; bank boards altered CEO compensation to encourage executives to exploit new growth opportunities; and bank boards set CEO incentives in a manner designed to moderate excessive risk-taking. These relationships are strongest during the second half of our sample, after deregulation and technological change had expanded banks' capacities for risk-taking.

Non-compliance, board structures and the performance of financial firms during crisis: UK Evidence

This paper examines the effectiveness of internal corporate governance mechanisms for improving the performance of financial firms in the UK. The research is first of its kind to look into the relationship between corporate governance and performance of financial firms in the UK before and during the financial crisis. Using Generalised Methods of Moments (GMM) estimates that control for dynamic endogeneity, this study shows that firm performance as measured by Total Shareholder Returns (TSR) and Return on Equity (ROE) is negatively associated with the level of non-compliance with the UK Corporate Governance Code. The study also finds that having higher number of internal controls is most effective monitoring mechanism and is positively associated with firm performance. However, board independence represented by the number of non-executive directs (NEDs) is the least effective monitoring mechanism and is negatively associated with the performance of firms. The study also shows that directors’ share ownership is an effective incentive mechanism for aligning their interests with shareholders as it is positively associated with firm performance. However, the findings suggest that remuneration is negatively associated with performance. Finally, the study provides evidence which indicates that board size impact the performance of firms differently in different time periods. As proposed by agency theory the study provides evidence that shows the positive impact of effective monitoring and incentive alignment for performance. It also provides support for the resource dependence view that directors are a critical resource during difficult economic times