Corporate Governance and Performance in the Wake of the Financial Crisis: Evidence from US Commercial Banks

19 Pages Posted: 14 Oct 2011

See all articles by Hugh Grove

Hugh Grove

University of Denver

Lorenzo Patelli

University of Denver - School of Accountancy

Lisa Victoravich

University of Denver - Daniels College of Business

Pisun (Tracy) Xu

University of Denver - Reiman School of Finance

Date Written: September 2011

Abstract

Manuscript Type: Empirical.

Research Question/Issue: Does corporate governance explain US bank performance during the period leading up to the financial crisis? We adopt the factor structure by Larcker, Richardson, and Tuna (2007) to measure multiple dimensions of corporate governance for 236 public commercial banks.

Research Findings/Insights: Findings reveal corporate governance factors explain financial performance better than loan quality. We find strong support for a negative association between leverage and both financial performance and loan quality. CEO duality is negatively associated with financial performance. The extent of executive incentive pay is positively associated with financial performance but exhibits a negative association with loan quality in the long‐run. We find a concave relationship between financial performance and both board size and average director age. We provide weak evidence of an association of anti‐takeover devices, board meeting frequency, and affiliated nature of committees with financial performance.

Theoretical/Academic Implications: We apply agency theory to the banking industry and expect that the governance‐performance linkage might differ due to the unique regulatory and business environment. Results extend Larcker et al. (2007), especially regarding the concave relationship between board size and performance, and the role of leverage. Given the lack of support for our agency theory predictions, we suggest that alternative theories are needed to understand the performance implications of corporate governance at banks.

Practitioner/Policy Implications: We offer contributions to regulators, especially for ongoing financial reforms of capital requirements and executive compensation. Specifically, we show a consistent negative association between leverage and performance, which supports the current debate on Tier I capital limits for banks.

Keywords: Corporate Governance, Banking Industry, Global Financial Crisis, Loan Quality

Suggested Citation

Grove, Hugh and Patelli, Lorenzo and Victoravich, Lisa and Xu, Pisun (Tracy), Corporate Governance and Performance in the Wake of the Financial Crisis: Evidence from US Commercial Banks (September 2011). Corporate Governance: An International Review, Vol. 19, Issue 5, pp. 418-436, 2011, Available at SSRN: https://ssrn.com/abstract=1943977 or http://dx.doi.org/10.1111/j.1467-8683.2011.00882.x

Hugh Grove (Contact Author)

University of Denver ( email )

School of Accountancy
Denver, CO 80208-2685
United States
303-871-2026 (Phone)
303-871-2016 (Fax)

Lorenzo Patelli

University of Denver - School of Accountancy ( email )

2101 South University
Boulevard, Suite 355
Denver, CO 80208-8921
United States
303.871.2959 (Phone)
303.871.2016 (Fax)

Lisa Victoravich

University of Denver - Daniels College of Business ( email )

2101 S. University Blvd.
Denver, CO 80208
United States

Pisun (Tracy) Xu

University of Denver - Reiman School of Finance

Denver, CO 80208-8951
United States

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