31 Pages Posted: 31 Aug 2007
Date Written: September 2007
This article provides an overview of research we have done on how different aspects of corporate governance influence bank performance. We use a random sample of state-chartered community banks in the Midwest and gather detailed information from bank examination reports on the ownership structure of these banks, the policymaking and operational responsibilities of their managers, and the wealth of key bank insiders. The sample banks have a wide range of management, ownership and board structures, thus providing a comprehensive look at various parts of the bank governance framework and the financial incentives that influence managers and owners. Among such incentives are the ownership of bank stock and the importance of this ownership to the overall financial wealth of prominent decision makers within each bank. We find that an ownership stake for hired managers can help improve bank performance, consistent with a reduction in principal-agent problems posited by financial theory. We also find that boards of directors are likely to have a more positive effect on community bank performance when directors have a significant financial interest in the bank. Finally, we find that the wealth and the financial positions of managers and directors significantly influence their own attitudes toward taking risk and their bank's risk-return trade-offs.
Keywords: bank profit efficiency risk, wealth management board directors, ownership diversification, principal agent agency, performance community, corporate governance
JEL Classification: G21, G34
Suggested Citation: Suggested Citation