Did Good Corporate Governance Improve Bank Performance during the Financial Crisis?

Abstract

This paper focuses on the effects of corporate governance on bank performance during the financial crisis of 2008. Using data on large publicly traded U.S. banks, we examine whether banks with stronger corporate governance mechanisms were associated with higher profitability and better stock market performance amidst the crisis. Our empirical findings on the effects of corporate governance on bank performance are mixed. Although the results suggest that banks with stronger corporate governance mechanisms were associated with higher profitability in 2008, our findings also indicate that strong governance may have had negative effects on stock market valuations of banks amidst the crisis. Nevertheless, we document that banks with strong corporate governance practices had substantially higher stock returns in the aftermath of the market meltdown, indicating that good governance may have mitigated the adverse influence of the crisis on bank credibility.

Does Bank Corporate Governance Matter for Bank Performance and Risk-Taking? New Insights of an Emerging Economy

“…However, corporate governance optimistically acts as an excellent mechanism during the financial crisis to minimize non-performing loan and keep banks stable financially and efficiently as the coefficients of CG*GFC are positive for stability (LNZ) and stability efficiency (SE) and negative for a non-performing loan to total loans (NPLTL). But unfortunately, contrary to our hypothesis and findings of Peni and Vähämaa (2012) corporate governance cannot be a significant determinant of bank performance during the crisis in a developing economy like Bangladesh. While financial freedom (FF) is also an insignificant determinant for bank performance and risk-taking as there is no significant relationship between them, as it could be explained as Bangladeshi financial sector is mostly restricted and therefore, it is yet to open the financial market.…”

“…But little evidence found that extend the relationship between bank risk and performance together in corporate governance literature, for example, Peni and Vähämaa (2012).…”

“…First, our study is extended to a concurrent study by Adams et al (2010); Beltratti and Stulz (2012); Erkens et al (2012); Peni and Vähämaa (2012); Hoque et al (2013);Zagorchev and Gao (2015) those who examine how firm-level and country-level factors such as bank characteristics, governance, and macroeconomic factors relate to bank performance and risk-taking. We augment their approach by showing both linear and non-linear impact of corporate governance on bank profitability and risk-taking behavior.…”

“…In other words, if CEO motivates by a shareholder value maximization principles have incentives to take risks that enhanced their compensation and, as a result, their firms" experienced inferior stock returns. While Peni and Vähämaa (2012) based on US banks find that strong corporate governance improves bank performance during 2008 financial crisis but detrimental for stock return. They also documented higher valuation of the stock market in the aftermath of the financial meltdown.…”

Board Accountability and Risk Taking in Banking: Evidence from a Quasi-Experiment

“…This is consistent with the view that boards pushed banks to engage in business strategies that were valued highly by shareholders before the crisis and turned out to be a source of weakness ex post. Similarly, Peni and Vähämaa (2012) document a negative association between strong governance mechanisms and stock market valuations for U.S. banks in 2008. In the immediate aftermath of the crisis, the association turned positive, however.…”