Excess Control Rights, Financial Crisis and Bank Profitability and Risk

41 Pages Posted: 19 Aug 2013 Last revised: 7 Nov 2013

See all articles by Amine Tarazi

Amine Tarazi

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE); University of Limoges - Faculty of Law and Economic Science

Nadia Zedek

Universite de Limoges, LAPE

Date Written: August 12, 2013

Abstract

We empirically investigate the impact of shareholders' excess control rights (greater control than cash-flow rights) on bank profitability and risk before, during, and after the global financial crisis of 2007-2008. We use a unique hand-crafted dataset tracing the complete control chains of 788 European commercial banks and cover the 2002-2010 period. We find that the presence of excess control rights is associated with lower profitability, higher risk-taking and higher default risk before (2002-2006) and after (2009-2010) the crisis. Conversely, it improves profitability and no longer affects risk during the crisis (2007-2008). Further evidence shows that, regardless of the period, the effect of excess control rights on profitability and risk is accentuated in family-controlled banks and in countries with relatively weak shareholder protection rights and that such an effect is only effective at intermediate and high levels of excess control rights. Overall, our findings contribute to the literature examining the corporate governance determinants of banks' performance during the 2007-2008 financial crisis and have several policy implications.

Keywords: excess control rights, pyramids, financial crisis, profitability, risk, European banking

JEL Classification: G01, G21, G28

Suggested Citation

Tarazi, Amine and Zedek, Nadia, Excess Control Rights, Financial Crisis and Bank Profitability and Risk (August 12, 2013). 26th Australasian Finance and Banking Conference 2013, Available at SSRN: https://ssrn.com/abstract=2311738 or http://dx.doi.org/10.2139/ssrn.2311738

Amine Tarazi (Contact Author)

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE) ( email )

5 rue Félix Eboué
BP 3127
Limoges Cedex 1, 87031
France

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

Nadia Zedek

Universite de Limoges, LAPE ( email )

rue François Mitterrand
Limoges Cedex, FL Limoges 87031
France

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