Corporate Governance in Banks: Do Ownership and Board Structure Matter for Banks' Risk Profile and Valuation?

Abstract

This study examines the risk profiles and valuation of banks relation in to the differences in corporate governance metrics. It also compares banks with non-banking firms with respect to differences in corporate governance mechanisms and valuation measures. The study finds that institutional ownership and block ownership are much lower for banking relative to non-banking firms, and insider ownership and majority of outside members on boards are slightly higher in non-banking firms. We find that corporate governance mechanisms are not associated with the Z-Score or insolvency risk of banks, while the evidence suggests that institutional ownership is associated with lower risk of insolvency for non-banking firms. The lack of relationship in banks could be explained by the fact that the Z-score is a measure closely monitored by regulators to prevent system instability and to initiate prompt corrective actions before the banks show insolvency signs. The results indicate that regulation is substituting for corporate governance mechanisms in banks.

It is argued that board independence in banks may not be an effective corporate governance mechanism perhaps because outside board members do not fully understand the banking industry characteristics.