Corporate Governance and the Insolvency Risk of Financial Institutions

54 Pages Posted: 20 Aug 2016 Last revised: 26 Jan 2018

See all articles by Searat Ali

Searat Ali

University of Wollongong; University of Wollongong - School of Accounting, Economics & Finance

Jamshed Iqbal

University of Jyväskylä; University of Vaasa, School of Accounting and Finance

Date Written: January 22, 2018

Abstract

We investigate whether corporate governance is related to insolvency risk of financial institutions. Using a large sample of U.S. financial institutions over the 2005–2010 period, we find that corporate governance is positively related with insolvency risk of financial institutions as proxied by Merton’s distance to default measure and credit default swap spread. We also find that “better” corporate governance increased insolvency risk relatively more for larger financial institutions and during the period of the global financial crisis. Our findings suggest that too-big-to fail and deposit insurance policies encourage excessive risk taking by financial institutions.

Keywords: corporate governance, boards, insolvency risk, bank risk-taking, financial crisis

JEL Classification: G01, G20, G21, G30, G32, G34

Suggested Citation

Ali, Searat and Ali, Searat and Iqbal, Jamshed, Corporate Governance and the Insolvency Risk of Financial Institutions (January 22, 2018). 29th Australasian Finance and Banking Conference 2016, Available at SSRN: https://ssrn.com/abstract=2826456 or http://dx.doi.org/10.2139/ssrn.2826456

Searat Ali

University of Wollongong ( email )

Northfields Avenue
Wollongong, NSW 2522
Australia
+61242392211 (Phone)

University of Wollongong - School of Accounting, Economics & Finance ( email )

Northfields Avenue
Wollongong, NSW 2522
Australia
+61242392211 (Phone)

Jamshed Iqbal (Contact Author)

University of Jyväskylä ( email )

PO Box 35
FI-40014
Jyväskylä, 40014
Finland

University of Vaasa, School of Accounting and Finance ( email )

P.O. Box 700
FIN-65101 Vaasa, FI-65101
Finland

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