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Corporate performance, board structure, and their determinants in the banking industry

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Renée B. Adams
Hamid Mehran

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Abstract

The subprime crisis highlights how little we know about the governance of banks. This paper addresses a long-standing gap in the literature by analyzing board governance using a sample of banking firm data that spans forty years. We examine the relationship between board structure (size and composition) and bank performance, as well as some determinants of board structure. We document that mergers and acquisitions activity influences bank board composition, and we provide new evidence that organizational structure is significantly related to bank board size. We argue that these factors may explain why banking firms with larger boards do not underperform their peers in terms of Tobin's Q. Our findings suggest caution in applying regulations motivated by research on the governance of nonfinancial firms to banking firms. Since organizational structure is not specific to banks, our results suggest that it may be an important determinant for the boards of nonfinancial firms with complex organizational structures such as business groups.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 330.

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Date of creation: 2008
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Handle: RePEc:fip:fednsr:330

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Related research
Keywords: Bank management ; Bank mergers ; Corporate governance ; Bank directors ; Competition;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Elijah Brewer, III & William E. Jackson, III & Julapa A. Jagtiana, 2000. "Impact of independent directors and the regulatory environment on bank merger prices: evidence from takeover activity in the 1990s," Working Paper Series WP-00-31, Federal Reserve Bank of Chicago. [Downloadable!]
  2. Stiroh, Kevin J., 2000. "How did bank holding companies prosper in the 1990s?," Journal of Banking & Finance, Elsevier, vol. 24(11), pages 1703-1745, November. [Downloadable!] (restricted)
  3. Renee Adams & Hamid Mehran, 2003. "Is corporate governance different for bank holding companies?," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 123-142. [Downloadable!]
  4. Yermack, David, 1996. "Higher market valuation of companies with a small board of directors," Journal of Financial Economics, Elsevier, vol. 40(2), pages 185-211, February. [Downloadable!] (restricted)
  5. Benjamin E. Hermalin & Michael S. Weisbach, 1988. "The Determinants of Board Composition," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 589-606, Winter. [Downloadable!] (restricted)
  6. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January. [Downloadable!] (restricted)
  7. Eisenberg, Theodore & Sundgren, Stefan & Wells, Martin T., 1998. "Larger board size and decreasing firm value in small firms1," Journal of Financial Economics, Elsevier, vol. 48(1), pages 35-54, April. [Downloadable!] (restricted)
  8. Klein, April, 1998. "Firm Performance and Board Committee Structure," Journal of Law & Economics, University of Chicago Press, vol. 41(1), pages 275-303, April.
  9. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, vol. 27(2), pages 595-612, October. [Downloadable!] (restricted)
  10. Jensen, Michael C, 1993. " The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Finance, American Finance Association, vol. 48(3), pages 831-80, July. [Downloadable!] (restricted)
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  11. Rajan, Raghuram G & Servaes, Henri & Zingales, Luigi, 1998. "The Cost of Diversity: The Diversification Discount and Inefficient Investment," CEPR Discussion Papers 1801, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. Eldenburg, Leslie & Hermalin, Benjamin E. & Weisbach, Michael S. & Wosinska, Marta, 2004. "Governance, performance objectives and organizational form: evidence from hospitals," Journal of Corporate Finance, Elsevier, vol. 10(4), pages 527-548, September. [Downloadable!] (restricted)
  13. Benjamin E. Hermalin & Michael S. Weisbach, 2001. "Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature," NBER Working Papers 8161, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Adams, Renée B. & Ferreira, Daniel, 2008. "Do directors perform for pay?," Journal of Accounting and Economics, Elsevier, vol. 46(1), pages 154-171, September. [Downloadable!] (restricted)
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  15. Himmelberg, Charles P. & Hubbard, R. Glenn & Palia, Darius, 1999. "Understanding the determinants of managerial ownership and the link between ownership and performance," Journal of Financial Economics, Elsevier, vol. 53(3), pages 353-384, September. [Downloadable!] (restricted)
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  16. Mehran, Hamid, 1995. "Executive compensation structure, ownership, and firm performance," Journal of Financial Economics, Elsevier, vol. 38(2), pages 163-184, June. [Downloadable!] (restricted)
  17. Baker, Malcolm & Gompers, Paul A, 2003. "The Determinants of Board Structure at the Initial Public Offering," Journal of Law & Economics, University of Chicago Press, vol. 46(2), pages 569-98, October.
  18. Kole, Stacey R. & Lehn, Kenneth M., 1999. "Deregulation and the adaptation of governance structure: the case of the U.S. airline industry," Journal of Financial Economics, Elsevier, vol. 52(1), pages 79-117, April. [Downloadable!] (restricted)
  19. Hallock, Kevin F., 1997. "Reciprocally Interlocking Boards of Directors and Executive Compensation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(03), pages 331-344, September. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Shams Pathan & Michael Skully & J. Wickramanayake, 2007. "Board Size, Independence and Performance: An Analysis of Thai Banks," Asia-Pacific Financial Markets, Springer, vol. 14(3), pages 211-227, September. [Downloadable!] (restricted)
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