How the corporate governance mechanisms affect bank risk taking

Mamatzakis, Emmanuel and Zhang, Xiaoxiang and Wang, Chaoke (2017): How the corporate governance mechanisms affect bank risk taking.

Abstract

The effectiveness of the management team, ownership structure and other corporate governance systems in determining appropriate risk taking is a critical issue in a modern commercial bank. Appropriate risk management techniques and structures within financial institutions play an important role to ensure the stability of economy. After analyzing 43 Asian banks over the period from 2006 to 2014, I find that banks with strong corporate governance are associated with higher risk taking. More specifically, banks with intermediate size of board, separation of CEO and chairman of board, and audited by Big Four audit firm, are likely higher risk taking. Overall, my findings provide some new perspectives into the governance mechanisms that affect risk taking on commercial banks.

• Item Type: MPRA Paper
• Language: English
• Keywords: Banks, Risk taking, Corporate governance
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; G - Financial Economics > G3 - Corporate Finance and Governance > G39 - Other

References

Acharya, V., Drechsler, I., Schnabl, P., 2014. A pyrrhic victory? Bank bailouts and sovereign credit risk. Journal of Finance 69, 2689-2739.

Adams, R. B., Mehran, H., 2012. Bank board structure and performance: Evidence for large bank holding companies. Journal of Financial Intermediation 21, 243-267.

Aebi, V., Sabato, G., Schmid, M., 2012. Risk management, corporate governance, and bank performance in the financial crisis. Journal of Banking and Finance 36, 3213-3226.

Anginer, D., Demirguc-Kunt, A., Huizinga, H., Ma, K., 2016. How does corporate governance affect bank capitalization strategies? Journal of Financial Intermediation 26, 1-27.

Anginer, D., Demirguc-Kunt, A., Zhu, M., 2014. How does deposit insurance affect bank risk? Evidence from the recent crisis. Journal of Banking and Finance 48, 312-321.

Bai, G., Elyasiani, E., 2013. Bank stability and managerial compensation. Journal of Banking and Finance 37, 799-813.

Barry, T. A., Lepetit, L., Tarazi, A., 2011. Ownership structure and risk in publicly held and privately owned banks. Journal of Banking and Finance 35, 1327-1340.

Beltratti, A., Stulz, R. M., 2012. The credit crisis around the globe: Why did some banks perform better? Journal of Financial Economics 105, 1-17.

Bennett, R. L., Hwa, V., Kwast, M. L., 2015. Market discipline by bank creditors during the 2008--2010 crisis. Journal of Financial Stability 20, 51-69.

Berger, A. N., Kick, T., Schaeck, K., 2014. Executive board composition and bank risk taking. Journal of Corporate Finance 28, 48-65.

Blundell, R., Bond, S., 1998. Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics 87, 115-143.

Bolton, P., Mehran, H., Shapiro, J., 2015. Executive compensation and risk taking. Review of Finance, rfu049.

Bouvatier, V., Lepetit, L., Strobel, F., 2014. Bank income smoothing, ownership concentration and the regulatory environment. Journal of Banking and Finance 41, 253-270.

Burkart, M., Panunzi, F., Shleifer, A., 2003. Family firms. Journal of Finance 58, 2167-2202.

Chernobai, A., Jorion, P., Yu, F., 2012. The determinants of operational risk in US financial institutions. Journal of Financial and Quantitative Analysis 46, 1683-1725.

Choe, H., Kho, B. C., Stulz, R. M., 2005. Do domestic investors have an edge? The trading experience of foreign investors in Korea. Review of Financial Studies 18, 795-829.

Core, J. E., Holthausen, R. W., Larcker, D. F., 1999. Corporate governance, chief executive officer compensation, and firm performance. Journal of Financial Economics 51, 371-406.

Cuñat, V., Guadalupe, M., 2009. Executive compensation and competition in the banking and financial sectors. Journal of Banking and Finance 33, 495-504.

De Andres, P., Vallelado, E., 2008. Corporate governance in banking: The role of the board of directors. Journal of Banking and Finance 32, 2570-258.

DeAngelo, H., Stulz, R. M., 2015. Liquid-claim production, risk management, and bank capital structure: Why high leverage is optimal for banks. Journal of Financial Economics 116, 219-236.

Demirguç-Kunt, A., Detragiache, E., 2002. Does deposit insurance increase banking system stability? An empirical investigation. Journal of monetary economics 49, 1373-1406.

DeYoung, R., Peng, E. Y., Yan, M., 2013. Executive compensation and business policy choices at US commercial banks. Journal of Financial and Quantitative Analysis 48, 165-19.

Ellul, A., Yerramilli, V., 2013. Stronger risk controls, lower risk: Evidence from US bank holding companies. Journal of Finance 68, 1757-1803.

Elyasiani, E., Zhang, L., 2015. Bank holding company performance, risk, and busy board of directors. Journal of Banking and Finance 60, 239–251.

Erkens, D. H., Hung, M., Matos, P., 2012. Corporate governance in the 2007--2008 financial crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance 18, 389-411.

Faccio, M., Lang, L. H., Young, L., 2001. Dividends and expropriation. American Economic Review 91, 54-7.

Fahlenbrach, Rü., Stulz, R. M., 2011. Bank CEO incentives and the credit crisis. Journal of Financial Economics 99, 11-26.

Ferreira, M. A., Matos, P., 2008. The colors of investors money: The role of institutional investors around the world. Journal of Financial Economics 88, 499-533.

Fratzscher, M., König, P. J., Lambert, C., 2016. Credit provision and banking stability after the Great Financial Crisis: The role of bank regulation and the quality of governance. Journal of International Money and Finance 66, 113-135.

Fu, X. M., Lin, Y. R., Molyneux, P., 2014. Bank competition and financial stability in Asia Pacific. Journal of Banking and Finance 38, 64-77.

Ghosh, A., 2015. Banking-industry specific and regional economic determinants of non-performing loans: Evidence from US states. Journal of Financial Stability 20, 93-104.

Hagendorff, J., Vallascas, F., 2011. CEO pay incentives and risk-taking: Evidence from bank acquisitions. Journal of Corporate Finance 17, 1078-1095.

Hakenes, H., Schnabel, I., 2010. Banks without parachutes: Competitive effects of government bail-out policies. Journal of Financial Stability 6, 156-168.

Haq, M., Heaney, R., 2012. Factors determining European bank risk. Journal of International Financial Markets, Institutions and Money 22, 696-718.

Hass, L. H., Vergauwe, S., Zhang, Q., 2014. Corporate governance and the information environment: Evidence from Chinese stock markets. International Review of Financial Analysis 36, 106-119.

Hilscher, J., Raviv, A., 2014. Bank stability and market discipline: The effect of contingent capital on risk taking and default probability. Journal of Corporate Finance 29, 542-560.

Hou, X., Gao, Z., Wang, Q., 2016. Internet finance development and banking market discipline: Evidence from China. Journal of Financial Stability 22, 88-100.

Iannotta, G., Nocera, G., Sironi, A., 2013. The impact of government ownership on bank risk. Journal of Financial Intermediation 22, 152-176.

Jensen, M. C., 1993. The modern industrial revolution, exit, and the failure of internal control systems. Journal of Finance 48, 831-880.

John, K., Litov, L., Yeung, B., 2008. Corporate governance and risk-taking. Journal of Finance 63, 1679-1728.

Keys, B. J., Mukherjee, T., Seru, A., Vig, V., 2009. Financial regulation and securitization: Evidence from subprime loans. Journal of Monetary Economics 56, 700-720.

Konishi, M., Yasuda, Y., 2004. Factors affecting bank risk taking: Evidence from Japan. Journal of Banking and Finance 28, 215-232.

Laeven, L., Levine, R., 2007. Is there a diversification discount in financial conglomerates? Journal of Financial Economics 85, 331-367.

Laeven, L., Levine, R., 2009. Bank governance, regulation and risk taking. Journal of Financial Economics 93, 259-275.

Lee, C. C., Hsieh, M. F., 2013. The impact of bank capital on profitability and risk in Asian banking. Journal of International Money and Finance 32, 251-281.

Leuz, C., Lins, K. V., Warnock, F. E., 2010. Do foreigners invest less in poorly governed firms? Review of Financial Studies 23, 3245-3285.

Liang, Q., Xu, P., Jiraporn, P., 2013. Board characteristics and Chinese bank performance. Journal of Banking and Finance 37, 2953-2968.

Lin, X., Zhang, Y., 2009. Bank ownership reform and bank performance in China. Journal of Banking and Finance 33, 20-29.

Minton, B. A., Taillard, Jé. P., Williamson, R., 2014. Financial expertise of the board, risk taking, and performance: Evidence from bank holding companies. Journal of Financial and Quantitative Analysis 49, 351-380.

Morck, R., Yeung, B., Yu, W., 2000. The information content of stock markets: why do emerging markets have synchronous stock price movements? Journal of financial economics 58, 215-260.

Pathan, S., 2009. Strong boards, CEO power and bank risk-taking. Journal of Banking and Finance 33, 1340-135.

Peng, W. Q., Wei, K. J., Yang, Z., 2011. Tunneling or propping: Evidence from connected transactions in China. Journal of Corporate Finance 17, 306-325.

Porta, R., Lopez-de-Silanes, F., Shleifer, A., 1999. Corporate ownership around the world. Journal of Finance 54, 471-517.

Saunders, A., Strock, E., Travlos, N. G., 1990. Ownership structure, deregulation, and bank risk taking. Journal of Finance 45, 643-654.

Srivastav, A., Hagendorff, J., 2015. Corporate Governance and Bank Risk-taking. Corporate Governance: An International Review 3, 334-345.

Sullivan, R. J., Spong, K. R., 2007. Manager wealth concentration, ownership structure, and risk in commercial banks. Journal of Financial Intermediation 16, 229-248.

Sun, L., Chang, T. P., 2011. A comprehensive analysis of the effects of risk measures on bank efficiency: Evidence from emerging Asian countries. Journal of Banking and Finance 35, 1727-1735.

Tetlock, P. C., 2007. Giving content to investor sentiment: The role of media in the stock market. Journal of Finance 62, 1139-1168.

Vazquez, F., Federico, P., 2015. Bank funding structures and risk: Evidence from the global financial crisis. Journal of Banking and Finance 61, 1-14.

Wang, T., Hsu, C., 2013. Board composition and operational risk events of financial institutions. Journal of Banking and Finance 37, 2042-2051.

Williams, B., 2014. Bank risk and national governance in Asia. Journal of Banking and Finance 49, 10-26.

Windmeijer, F., 2005. A finite sample correction for the variance of linear efficient two-step GMM estimators. Journal of econometrics 126, 25-51.

Wooldridge, J.M., 2002. Econometric Analysis of Cross Section and Panel Data. MIT.