abstract
We use a sample of large international commercial banks to test hypotheses on the dual role of boards of directors. We use a suitable econometric model (two step system estimator) to solve the well-known endogeneity problem in corporate governance literature, and demonstrate the empirical and theoretical superiority of system estimator over OLS and within estimators. We find an inverted U-shaped relation between bank performance and board size, and between the proportion of non-executive directors and performance. Our results show that bank board composition and size are related to directors’ ability to monitor and advise management, and that larger and not excessively independent boards might prove more efficient in monitoring and advising functions, and create more value. All of these relations hold after we control for the measure of performance, the weight of the banking industry in each country, bank ownership, and regulatory and institutional differences.
1. Introduction
The Basel Committee on Banking Supervision (BCBS) has called attention to the need to study, understand, and improve the corpo- rate governance of financial entities. The BCBS especially advocates a governance structure composed of a board of directors and senior management (Enhancing Corporate Governance for Banking Orga- nizations, September 1999 and February 2006). The core of the BCBS message is the conviction that good corporate governance increases monitoring efficiency. Furthermore, the Committee believes that corporate governance is necessary to guarantee a sound financial system and, consequently, a country’s economic development. To date, there are many studies on corporate governance, yet only a few papers focus on banks’ corporate governance (e.g., Adams and Mehran, 2005; Caprio et al., 2007; Levine, 2004; Macey and O’Hara, 2003), even though the key aspects of corporate gover- nance can be applied to banks. The problems of collective action faced by stakeholders who wish to ensure the efficient allocation of resources and the distribution of quasi rents, and the problems derived from different types of ownership and control, are clearly relevant to financial entities.
However, the relevance of banks in the economic system and the nature of the banking business make the problems involved in their corporate governance highly specific, as are the mecha- nisms available to deal with such problems. The complexity of the banking business increases the asymmetry of information and diminishes stakeholders’ capacity to monitor bank managers’ decisions. Banks are a key element in the payment system and play a major role in the functioning of economic systems. They are also highly leveraged firms, due mainly to the deposits taken from cus- tomers. For all these reasons, banks are subject to more intense regulation than other firms, as they are responsible for safeguard- ing depositors’ rights, guaranteeing the stability of the payment system, and reducing systemic risk. 留学生论文代写网代写留学生论文,英国硕士论文,澳洲论文,
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