Corporate Governance in Banks: An Empirical Study of the Effect of Board Structures on the Performance and Risk-taking of Western European Banks

Andreas Børsting Lundquist & Alexander Hymøller

Student thesis: Master thesis

Abstract

This thesis investigates the effect of board related corporate governance mechanisms on bank performance and bank risk-taking using a sample of 55 Western European banks from 2007-2016. Through a review of the agency theory, the theoretical corporate governance problems in the banking sector, and the empirical corporate governance literature on banks, we develop six hypotheses which are tested using OLS and fixed effect regressions.
From our empirical results, we find an indication that board size affect both bank performance and bank risk-taking, and that board independence affect bank risk-taking. We find an inverted U-shaped relationship between board size and bank performance and a U-shaped relationship between board size and bank risk-taking. We explain these relationships by the ability of the board directors to advice and monitor management. Using non-performing assets over total assets as a proxy for risk-taking we find an inverted U-shaped relationship between the proportion of independent directors and bank risk-taking. The inverted U-shaped relationship might be explained by the combination of increasing information asymmetry and the changing reputational effects of independent directors.
We contribute to the existing literature as our findings provide indications that the size of the board affects bank performance. Furthermore, we contribute to the limited literature regarding bank risk-taking as we find indications of how specific board related corporate governance mechanisms affect bank risk-taking. Finally, we provide a discussion of the limitations of this thesis and possible areas for future research to investigate within corporate governance for banks.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2018
Number of pages122
SupervisorsAleksandra Gregoric