Bank Governance and Acquisition Performance

Abstract

Given the pivotal role of banks in modern economies, the worldwide phenomenon of a high level of bank M&A activity and the consensus view in empirical studies that bank mergers destroy value for acquiring bank shareholders, it is highly surprising that the influence of corporate governance on the outcomes of bank acquisitions has received very little academic scrutiny. The recent wave of consolidation in the financial services industry, with its generally unfavourable wealth implications for the shareholders of acquiring institutions, points to the impact of poor bank governance structures. Moreover, the banking sector warrants a separate agency analysis because it is unusual, if not unique, in terms of the opaque nature of many of its main activities and in terms of the pervasive role of regulation in the industry. Both of these attributes may weaken well-established monitoring mechanisms as safeguards of shareholder interests.

In this article we advocate an extension of empirical work to focus more clearly on the relationship between banks' governance attributes and the success of bank mergers. We summarise emerging evidence from US research which points to a role for sound governance mechanisms such as managerial pay incentives and board composition that may help prevent bank executives from pursuing value-destroying acquisitions.

Keywords: Bank acquisitions, performance, board composition, board diversity