The Effect Of Directors´ Network Size On Bank Performance: A Multilevel Longitudinal Approach

Patrick Kristiansen

Student thesis: Master thesis


Financial institutions have played a major role in the financial crisis of the recent years. This has yet again renewed the interest for how banks are directed and controlled, also known as the field of Corporate governance. In Corporate governance theory it is well established that the board of directors is an important means for the owners to secure a return on their investment in terms of affecting company strategy and keeping an eye on the management. From this it follows that certain characteristics are crucial as for assembling a well-functioning board of directors. According to Resource dependence theory, the directors all bring with them resources that may prove beneficial in minimizing the external uncertainties facing the company. Therefore and as suggested by Social network theories, directors with connections to the external environment may aid the company in reducing the dependence on the external environment. The objective of this thesis is to look at European banks during the financial crisis and investigate whether directors´ network size has an effect on bank performance. The dataset is collected from 118 European banks in the time-period 2005-2011. This includes 10 166 observations from 23 different countries. The gathered data is found to be dependent at three levels (across time, between companies nested within countries and between countries) and therefore a longitudinal multilevel model is applied in the analysis. This methodology allows us to calculate the variance within each grouping separately and thereby controls for the dependence. In applying the Multilevel approach, this thesis models two separate regressions, one using Tobin´s Q as the dependent variable and one using Return on assets. In both models we control for financial, board-specific and director-specific effects that may have an impact on financial performance of the banks. The results of the analysis suggest that directors´ network size has no significant effect on bank performance, measured as either Return on assets or Tobin´s Q. However, for Return on assets we find evidence that the impact of directors´ network size on bank performance is likely to differ between countries. Put differently, we find that a country´s governance quality negatively moderates the effect of directors´ network size on actual bank performance. This result is in accordance with Institutional theory, which suggests that linkages to the external environment are more important in less developed, bureaucratic countries.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2012
Number of pages112