The Effects of Financial Deregulation on Bank Governance: The Panel Data Evidence of the 1990s

This paper examines the effects of the financial deregulation during the 1990s on the board composition of banks which, in turn, can be used to implicate bank governance. The banking legislation in the 1990s permits banks to merge across states and also motivates states to relax other banking restrictions. Using the panel data of about 1900 banks in 14 states for 3 years, I find that banks in states with intrastate branching deregulation have a lower proportion of outside board directors (OBDs) and banks in states with interstate banking and the bank holding company deregulation have a higher percentage of OBDs. De novo entry deregulation also leads to a higher percentage of OBDs, although the effect is not so significant. Moreover, using two-stage regressions, I am able to show that interstate deregulation, notably interstate banking and de novo entry, impacts the board composition through takeover possibilities. Therefore, the substitute hypothesis, stating that a takeover threat and OBD monitoring are substitutes in controlling managers, does not seem to hold for the banking industry. Finally, by performing additional two-stage regressions, I find that the board composition change resulted from intrastate branching deregulation arises from bank branching behavior.