Top

Journal of Financial Services Research

Published in:

21-01-2022

Implications for Bank Risk when Directors are Related to Minority Shareholders

Authors: Thierno Amadou Barry, Laetitia Lepetit, Frank Strobel, Thu Ha Tran

Published in: Journal of Financial Services Research | Issue 3/2022

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

We examine whether directors on a board who are related to minority shareholders have an effect on bank risk. We use a panel of European banks with a controlling shareholder over the period from 2003 to 2017 and find that these directors result in lower risk. Our results depend crucially on whether or not such directors have reputational concerns or financial expertise, and the level of shareholder protection; the observed decrease in risk does not depend on their position on the board or on the presence of controlling shareholders. To identify the relationship, we use a dynamic generalized method of moments.

previous article Liquidity Creation and Trust Environment

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Available only for authorised users

Spain has introduced a proportional voting system in 2000 that allows for a minority of shareholders to appoint directors in proportion to their equity stake in both listed and non-listed corporations. In Italy, the Corporate Governance Codes have recommended since 2005 that listed companies should reserve at least one seat on the board of directors to persons that are not appointed by controlling shareholders. See Gutiérrez and Sáez (2013) for further details.

Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

For example, Kim et al. (2007) uses a similar threshold.

However, we were unable to ascertain who does in fact nominate particular directors.

In our sample, 43 directors had the same family name as one of the minority shareholders. Taking into account only directors with the same family name as minority shareholders when the name was not common in each country, we were left with 33 related directors according to this criterion. As a robustness test, we removed all these cases from the sample.

We alternatively used the radius method and the kernel or caliper approach to obtain similar results.

Adams R, Hermalin B, Weisbach M (2010) The role of boards of directors in corporate governance: a conceptual framework and survey. J Econ Lit 48:58–107CrossRef

Arellano M, Bover O (1995) Another look at the instrumental variable estimation of error-component model. J Econ 68:29–51CrossRef

Baltagi BH (2005) Econometric analysis of panel data. Third Edition

Basel Committee on Banking Supervision (2010) Principles for enhancing corporate governance. Bank for International Settlements, Basel, Switzerland

Basel Committee on Banking Supervision (2015) Corporate governance principles for banks, Basel, Switzerland: Bank for International Settlements.

Battaglia F, Gallo A (2017) Strong boards, ownership concentration and EU banks’ systemic risk-taking: evidence from the financial crisis. Journal of International Financial Markets, Institution and Money 46:128–146CrossRef

Beltratti A, Stulz RM (2012) The credit crisis around the globe: why did some banks perform better? J Financ Econ 105:1–17CrossRef

Bennett RL, Güntay L, Unal H (2015) Inside debt, bank default risk, and performance during the crisis. J Financ Intermed 24:487–513CrossRef

Billett MT, Garfinkel JA, O’Neal ES (1998) The cost of market versus regulatory discipline in banking. J Financ Econ 48:333–358CrossRef

Blundell R, Bond S (1998) Initial conditions and moment restrictions in dynamic panel data models. J Econ 87:115–143CrossRef

Dahya J, Dimitrov O, McConnell JJ (2008) Dominant shareholders, corporate boards, and corporate value: a cross-country analysis. J Financ Econ 87:73–100CrossRef

De Andres P, Vallelado E (2008) Corporate governance in banking: the role of the board of directors. J Bank Financ 32:2570–2580CrossRef

De Haan J, Vlahu R (2016) Corporate governance of banks: a survey. J Econ Surv 30:228–277CrossRef

Dewatripont M, Tirole J (1994) The prudential regulation of banks. MIT Press, Cambridge, MA

Djankov S, La Porta R, Lopez-de-Silanes F, Shleifer A (2008) The law and economics of self–dealing. J Financ Econ 88:430–465CrossRef

Doidge C, Karolyi GA, Stulz R (2004) Why are foreign firms listed in the US worth more? J Financ Econ 71:205–238CrossRef

Drucker S, Puri M (2005) On the benefits of concurrent lending and underwriting. J Financ 60:2763–2799CrossRef

Durnev A, Kim EH (2005) To steal or not to steal: firm attributes, legal environment, and valuation. J Financ 60:1461–1493CrossRef

Faccio M (2006) Politically connected firms. Am Econ Rev 96:369–386CrossRef

Faccio M, Lang LHP (2002) The ultimate ownership of Western European corporations. J Financ Econ 65:365–395CrossRef

Faccio M, Marchica MT, Mura R (2011) Large shareholder diversification and corporate risk-taking. Rev Financ Stud 24:3601–3641CrossRef

Fama EF, Jensen MC (1983) Separation of ownership and control. J Law Econ 26:301–325CrossRef

Fratianni M, Marchionne F (2013) The banking bailout of the subprime crisis: was the bang worth the buck? J Int Financ Mark Inst Money 23:240–264CrossRef

Galai D, Masulis RW (1976) The option pricing model and the risk factor of stock. J Financ Econ 3:53–81CrossRef

Gilson SC (1990) Bankruptcy, boards, banks, and blockholders: Evidence on changes in corporate ownership and control when firms default. J Financ Econ 27:355–387

Goldman E, Rocholl J, Jongil S (2009) Do politically connected boards affect firm value? Rev Financ Stud 22:2331–2360CrossRef

Goldman E, Rocholl J, Jongil S (2013) Political connections and the allocation of procurement contracts. Rev Finance 17:1617–1648CrossRef

Güner AB, Malmendier U, Tate G (2008). Financial expertise of directors. Journal of Financial Economics 88: 323–354

Gutiérrez M, Sáez M (2013) Deconstructing independent directors. J Corp Law Stud 13:63–94CrossRef

Haw IM, Ho SSM, Hu B, Wu D (2010) Concentrated control, institution and banking sector: An international study. J Bank Financ 34:485–497

Hermalin BE, Weisbach MS (1998) Endogenously chosen boards of directors. Am Econ Rev 88:96–118

Hermalin BE, Weisbach MS (2003) Boards of directors as an endogenously determined institution: a survey of the economic literature. Federal Reserve Bank of New York Economic Policy Review: 7–26

Houston JF, Jiang L, Lin C, Ma Y (2014) Political connections and the cost of bank loans. J Account Res 52:193–243CrossRef

Jensen MC, Meckling WH (1976) Theory of the firm: managerial behavior, agency costs and ownership structure. J Financ Econ 3:305–460CrossRef

John K, Litov L, Yeung B (2008) Corporate governance and risk-taking. J Financ 63:1979–1728CrossRef

Johnson S, La Porta R, Lopez-de-Silanes F, Shleifer A (2000) Tunneling. Am Econ Rev 90:22–27CrossRef

Kaplan S, Reishus D (1990) Outside directorships and corporate performance. J Financ Econ 27:389–410

Kim K, Kitsabunnarat-Chatjuthamard P, Nofsinger JR (2007) Large shareholders, board independence, and minority shareholder rights: evidence from Europe. J Corp Finan 13:859–880CrossRef

Kim J, Kim M, Kim Y (2020) Bank transparency and the market’s perception of bank risk. J Financ Serv Res 58:115–142CrossRef

Kirkpatrick G (2009) The corporate governance lessons from the financial crisis. Financial Markets Trends 2009/1, OECD

Laeven L, Levine R (2009) Bank governance, regulation and risk taking. J Financ Econ 93:259–275

Lepetit L, Meslier C, Wardhana LI (2017) Reducing agency conflicts through bank dividend payout decisions: the role of opacity and ownership structure. Appl Econ 49:4999–5026CrossRef

Levine R (2004) The corporate governance of banks: a concise discussion of concepts and evidence. Policy Research Working Paper of World Bank 3404

Lombardo D, Pagano M (2002) Law and equity markets: a simple model. In: McCahery JA (ed) Corporate governance regimes: convergence and diversity. Oxford University Press, London

Mehran H, Morrison A, Shapiro J (2011) Corporate governance and banks: what have we learned from the financial crisis? In Staff report, Federal Reserve Bank of New York

Merton RC (1977) An analytic derivation of the cost of deposit insurance and loan guarantees. J Bank Financ 1:3–11CrossRef

Minton B, Taillard J, Williamson R (2014) Financial expertise of the board, risk taking, and performance: evidence from bank holding companies. J Financ Quant Anal 49:351–380CrossRef

Molyneux P, Schaeck K, Zhou TM (2014) ‘Too systemically important to fail’ in banking–evidence from bank mergers and acquisitions. J Int Money Financ 49:258–282CrossRef

Morgan DP (2002) Rating banks: risks and uncertainty in an opaque industry. Am Econ Rev 92:874–888CrossRef

Niessen A, Ruenzi S (2010) Political connectedness and firm performance: evidence from Germany. Ger Econ Rev 11:441–464CrossRef

OECD (2010) Corporate governance and financial crisis, OECD Steering Group on Corporate Governance, Paris, 1–34

Paligorova T (2010) Corporate risk taking and ownership structure. Working paper No3. Bank of Canada

Pathan S, Faff R (2013) Does board structure in banks really affect their performance? J Bank Financ 37:1573–1589CrossRef

Roodman DM (2009) How to do xtabond2: an introduction to difference and system GMM in Stata. Stata J 9:86–136CrossRef

Rossi S, Volpin P (2004) Cross-country determinants of mergers and acquisitions. J Financ Econ 74:277–304CrossRef

Saunders A, Strock E, Travlos NG (1990) Ownership structure, Deregulation, and bank risk taking. The Journal of Finance 45:643–654

Shleifer A, Vishny R (1986) Large shareholders and corporate control. J Polit Econ 94:461–488

Shleifer A, Wolfenzon D (2002) Investor protection and equity markets. J Financ Econ 66:3–27CrossRef

Stulz R (2005) The limits of financial globalization. J Financ 60:1595–1638CrossRef

Windmeijer F (2005) A finite sample correction for the variance of linear efficient two-step GMM estimators. J Econ 126:25–51CrossRef

Wintoki MB, Linck JS, Netter JM (2012) Endogeneity and the dynamics of internal corporate governance. J Financ Econ 105:581–606CrossRef

Zhang G (1998) Ownership concentration, risk aversion and the effect of financial structure on investment decisions. Eur Econ Rev 42:1751–1778CrossRef

Zhou X (2001) Understanding the determinants of managerial ownership and the link between ownership and performance. J Financ Econ 62:559–571CrossRef

Title: Implications for Bank Risk when Directors are Related to Minority Shareholders
Authors: Thierno Amadou Barry
Laetitia Lepetit
Frank Strobel
Thu Ha Tran
Publication date: 21-01-2022
Publisher: Springer US
Published in: Journal of Financial Services Research / Issue 3/2022
Print ISSN: 0920-8550
Electronic ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-021-00371-y