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Toward a Better Measure of Bank Corporate Governance

In: International Corporate Governance

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  • James E. McNulty
  • Aigbe Akhigbe

Abstract

Directors help determine the strategic direction of a corporation and are responsible for ensuring the institution has a good system of internal control. Banking institutions without a strategic direction emphasizing sound lending practices that promote the long-run financial health and viability of the institution will be sued more frequently than peer institutions. Institutions that do not have a good system of internal control will also be sued more frequently. Hence, legal expense is a bank corporate governance measure. We compare the performance of bank legal expense and a widely cited corporate governance index in a regression framework to determine which better predicts bank performance. The regressions indicate legal expense is a much better predictor, hence a better measure of bank corporate governance. Regulators should require legal expense reporting and rank institutions by the ratio of legal expense to assets to help identify institutions with weak governance. Seven case studies illustrate the role of legal expense in corporate governance.

Suggested Citation

  • James E. McNulty & Aigbe Akhigbe, 2015. "Toward a Better Measure of Bank Corporate Governance," Advances in Financial Economics, in: International Corporate Governance, volume 18, pages 81-124, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:afeczz:s1569-373220150000018004
    DOI: 10.1108/S1569-373220150000018004
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    Cited by:

    1. McNulty, James E. & Akhigbe, Aigbe, 2017. "What do a bank’s legal expenses reveal about its internal controls and operational risk?," Journal of Financial Stability, Elsevier, vol. 30(C), pages 181-191.

    More about this item

    Keywords

    Bank corporate governance; bank litigation; bank performance; internal control; G21; G28; G34; G38;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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