Board Monitoring, Regulation and Performance in the Banking Industry: Evidence from the Market for Corporate Control

Posted: 29 Feb 2008 Last revised: 16 Jun 2010

See all articles by Jens Hagendorff

Jens Hagendorff

University of Edinburgh - Business School

Michael Collins

University of Leeds

Kevin Keasey

University of Leeds - Division of Accounting and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: April 26, 2010

Abstract

The specific monitoring effect of boards of directors versus industry regulation is unclear. In this paper, we examine how the interaction between bank-level monitoring and regulatory regimes influences the announcement period returns of acquiring banks in the US and twelve European economies. We study three board monitoring mechanisms (independence, CEO-chair duality and diversity) and analyze their effectiveness in preventing underperforming merger strategies under bank regulators of varying strictness. Only under strict banking regulation regimes, board independence and diversity improve acquisition performance. In less strict regulatory environments, corporate governance is virtually irrelevant in improving the performance outcomes of merger activities. Our results indicate a complementary role between monitoring by boards and bank regulation. This study is the first to report evidence consistent with complementarity by investigating the effectiveness (rather than the prevalence) of governance arrangements across regulatory regimes. Our work offers insights to policymakers charged with improving the quality of decision-making at financial institutions. Attempts to improve the ability of bank boards to critically assess managerial initiatives are most likely to be successful if internal governance is accompanied by strict industry regulation.

Keywords: banks, mergers, corporate governance, regulation

JEL Classification: G21, G34, G28, G18

Suggested Citation

Hagendorff, Jens and Collins, Michael and Keasey, Kevin, Board Monitoring, Regulation and Performance in the Banking Industry: Evidence from the Market for Corporate Control (April 26, 2010). Corporate Governance: An International Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1099387

Jens Hagendorff (Contact Author)

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
UNITED KINGDOM

Michael Collins

University of Leeds ( email )

Leeds, LS2 9JT
United Kingdom

Kevin Keasey

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 2618 (Phone)

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