Internal Control Quality and Bank Performance During the Financial Crisis

45 Pages Posted: 3 Jan 2019

See all articles by Matthew Baugh

Matthew Baugh

Arizona State University (ASU) - School of Accountancy

Matthew Ege

Texas A&M University - Department of Accounting

Christopher G. Yust

Texas A&M University

Date Written: December 17, 2018

Abstract

It is unclear whether strong internal controls at banks lead to more efficient risk-taking or to absolute reductions in risk-taking, which reduces the likelihood of bad and good outcomes. We find that banks that disclosed a material weakness in internal controls prior to the crisis are more (less) likely to have experienced extreme negative (positive) performance during the crisis, suggesting internal controls improve efficient risk-taking. We also find that these banks increased lending in the crisis, contributing to the origination of bad loans. Overall, results suggest that internal controls do not just reduce risk-taking but also improve performance, on average.

Keywords: financial crisis, bank performance, lending, internal control quality

JEL Classification: E50, G01, G21, M41, M48

Suggested Citation

Baugh, Matthew and Ege, Matthew and Yust, Christopher G., Internal Control Quality and Bank Performance During the Financial Crisis (December 17, 2018). Available at SSRN: https://ssrn.com/abstract=3302936 or http://dx.doi.org/10.2139/ssrn.3302936

Matthew Baugh

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Matthew Ege

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Christopher G. Yust (Contact Author)

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States
979.845.3439 (Phone)

HOME PAGE: http://www.christopheryust.com

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