Bank Corporate Governance and Future Earnings Predictability

This study examines the impact of corporate governance on earnings predictability of future cash flow, a forward-looking earnings quality indicator, in large banks from 35 countries over the period 2004–2010. We find that board structure and CEO power have a significant positive influence on future cash flows although these findings vary for emerging markets and between common and civil law countries. Board structure and CEO power are more effective in predicting future cash flows in civil law countries whereas in common law countries risk governance is a more accurate predictor of future earnings. Similarly, we find differences between developed and emerging countries. While in both domains there is no qualitative difference in CEO power to predict future cash flows, board structure and risk governance appear less effective in emerging economies. The study has important implications for policy makers and regulators for different legal regimes (civil vs. common law) and for countries at different stages of economic development (developed vs. emerging) due to the varying impact of governance on bank earnings quality in these countries.