The effect of corporate governance on the performance of US investment banks

This paper focuses on the impact of the corporate governance, using a plethora of measures, on the performance of US investment banks over the 2000-2012 period. This time period offers a unique set of information, related to the credit crunch, that we model using a dynamic threshold analysis to reveal new insights into the relationship between corporate governance and bank performance. Results show that the board size asserts a negative effect on performance consistent with the ‘agency cost hypothesis’, particularly for banks with board size higher than ten members. Threshold analysis reveals that in the post-crisis period most of investment banks opt for boards with less than ten members, aiming to decrease agency conflicts that large boards suffer from. We also find a negative association between operational complexity and performance. Moreover, CEO power asserts a positive effect on performance consistent with the ‘stewardship hypothesis’. In addition, an increase in the bank ownership held by the board has a negative impact on performance for banks below a certain threshold. On the other hand, for banks with board ownership above the threshold value this effect turns positive, indicating an alignment between shareholders’ and managers’ incentives.