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

Abstract

Article History JEL Classification:C2; E43; G21; G28; G34.This study empirically focuses on the effects of corporate governance on bank performance and risk-taking during the financial crisis of [2007][2008]. Using a balanced panel data in an emerging economy, we examine whether banks with corporate governance mechanism have heterogeneous effect on profitability and risk-taking amidst the crisis. Our empirical findings show that corporate governance derives benefits concerning profitability and risk-taking for the banks. Particularly, the key results are as follows: (i) corporate governance is a good mechanism of abating risk during global financial crisis; (ii) a U-shaped negative relation exists between corporate governance, profitability, and risk-taking; (iii) notably, corporate governance in Islamic bank is superior to conventional bank that can increase the stability of efficiency; and (iv) corporate governance has long-run effects on profitability and risk-taking behavior. Contribution/ Originality:This study contributes to the existing literature in the following ways: first, considering Bangladesh as an emerging economy, it shows both linear and non-linear impact of corporate governance by addressing recent financial crisis on bank performance and risk-taking behavior; second, it empirically uses efficiency stability as an inverse measure of risk; and finally, it includes generalized method of moments (GMM) and dynamic ordinary least square (DOLS) together in governance literature.

The effect of financial soundness variables on bank performance: a macro-level analysis in MSCI Emerging Market Index countries

“…Table 7 shows that country governance variables have no impact on bank performance. Studies argue that governance variables can reduce bank risk and provide predictability (Moudud-Ul-Huq et al, 2018). Our results are consistent with the bank minority of bank performance literature and argue that country governance variables do not affect bank performance in emerging countries (Elmawazini and Khalid, 2017).…”

“…Table 7 shows that country governance variables have no impact on bank performance. Studies argue that governance variables can reduce bank risk and provide predictability (Moudud-Ul-Huq et al. , 2018).…”

Bank competition, risk-taking and financial stability: insights from an emerging economy

“…Also, some variables or unobserved effects are not specified in the regression but subsumed in the stochastic disturbance term that affects both bank stability and competition, thus amounting to a correlation between the error term and competition measure. Therefore, to obtain unbiased and consistent estimates after addressing the issue of endogeneity (Moudud-Ul-Huq et al , 2018), we use a two-step system generalized method of moments (GMM) of Blundell and Bond (1998) with Windmeijer’s (2005) finite sample correction for dynamic panel data. We do not use the fixed effects estimation technique within our dynamic panel framework as it provides inconsistent and biased results for dynamic relationships (Dalwai et al , 2021; Goswami, 2021).…”

“…According to the competition-fragility view, competition results in bank failures, which may destabilize various crucial macroeconomic indicators. By disrupting the payment system and interbank lending market, the effects of a shock to one bank have the potential to spread to other banks through contagion (Noman et al , 2017; Danisman, 2018; Moudud-Ul-Huq et al , 2018). As a result, researchers, policymakers and regulators have concentrated their efforts on identifying factors contributing to bank soundness.…”

The Effect of Bank Recapitalization and Corporate Governance on Performance of Banking Sector: A Proposed Conceptual Framework

“…For instance, in the studies of Bhagat et al, 2011;Bhaumik and Selarka, 2012;Ding et al, 2013;Donou-Adonsou and Sylwester, 2017;Ernovianti and Ahmad, 2017;Etri et al, 2016;Nicholson and Salaber, 2013;Yusupov, 2012) found a positive relationship and (Aybar and Ficici, 2009;Bertrand and Betschinger, 2012;Bibi et al, 2018;Forssbaeck and Nielsen, 2016;Tomec and Jagrič, 2017) found negative relationship while (Adedeji et al, 2015;Liao and Williams, 2008) found no relationship between the two variables. Moreover, the previous empirical studies reported a strong relationship between corporate governance and bank's performance (Grassa and Matoussi, 2014;Hakimi et al, 2018;Huq et al, 2018;Pathan and Faff, 2013). The above observed inconsistent findings are what led to the introduction of corporate governance to moderate the relationship between recapitalization and the bank's performance.…”