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Corporate Governance and Depository Institutions Failure: the Case of an Emerging Market Economy

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  • Desrochers, Martin
  • Fischer, Klaus P.

Abstract

In this paper we study the relationship that exists between ownership and governance structure of depository institutions (DI) on one side, and the dominant cause of failure on the other. Extant theory implies that while in stock owned DI where management is either well controled (through markets or board control) or interests are aligned with those of shareholders, the dominant cause of failure will be moral hazard between shareholders and debtholders, manifested in balance sheet or off-balance sheet risk taking. On the other hand, in DI of diffuse ownership with poor management control or where management’s interests are not alligned with those of owners, the dominant cause of failure will be agency costs, manifested in expense preference behavior that leads of failure. We exploit the opportunity that offers the Colombian crisis of banks and financial cooperatives (FC) and the relatively good quality of data available for this country to perform the study. Our objective is to establish empirically the relative importance of these two conflicts as determinants of insolvency in DI. Results suggest that, in the case of Colombia, moral hazard is a key factor in explaining bank failure while agency costs explain insolvencies among FC. In state-owned banks both moral hazard and agency costs are significant in explaining failure. We also control whether the absence « quality of management » provides a better explanation of failure than agency costs, but reject this hypothesis.

Suggested Citation

  • Desrochers, Martin & Fischer, Klaus P., 2002. "Corporate Governance and Depository Institutions Failure: the Case of an Emerging Market Economy," Cahiers de recherche 0201, CIRPEE.
  • Handle: RePEc:lvl:lacicr:0201
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    Cited by:

    1. Wang, Cheng, 1997. "Incentives, CEO Compensation, and Shareholder Wealth in a Dynamic Agency Model," Journal of Economic Theory, Elsevier, vol. 76(1), pages 72-105, September.
    2. repec:kap:annfin:v:13:y:2017:i:2:d:10.1007_s10436-017-0296-x is not listed on IDEAS
    3. Mersland, Roy & Øystein Strøm, R., 2009. "Performance and governance in microfinance institutions," Journal of Banking & Finance, Elsevier, vol. 33(4), pages 662-669, April.
    4. Arrassen, Wassini, 2013. "La microfinance : quelles leçons tirées des expériences des pays en développement ?," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/12692 edited by Avouyi-Dovi, Sanvi.
    5. Barry, Thierno Amadou & Tacneng, Ruth, 2014. "The Impact of Governance and Institutional Quality on MFI Outreach and Financial Performance in Sub-Saharan Africa," World Development, Elsevier, vol. 58(C), pages 1-20.
    6. Marc Labie & Anaïs Périlleux, 2008. "Corporate governance in microfinance: credit unions," Working Papers CEB 08-003.RS, ULB -- Universite Libre de Bruxelles.
    7. Mersland, Roy & Strøm, Reidar Øystein, 2007. "Performance and corporate governance in microfinance institutions," MPRA Paper 3888, University Library of Munich, Germany.
    8. Roy Mersland & Reidar Øystein Strøm, 2008. "Performance and trade-offs in Microfinance Organisations-does ownership matter?," Journal of International Development, John Wiley & Sons, Ltd., vol. 20(5), pages 598-612.
    9. Martin Desrochers & Klaus P. Fischer, 2003. "Theory and Test on the Corporate Governance of Financial Cooperative Systems: Merger vs. Networks," Cahiers de recherche 0334, CIRPEE.

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