Corporate governance, financial distress, and risk-taking in the USA banking sector

This thesis investigates the role of corporate governance in US bank holding companies between 1998 to 2007. In the course of the thesis, four main contributions to extant literature are brought to the fore. First, the research facilitates a better understanding of the link between corporate governance and risk-taking. This is the main focus of the thesis and so this strand permeates the entire text. Second, it constructs a distance-to-default indicator, which is used to predict and compare financial conditions in banks that issued subordinated debt with those that did not. Third, it considers the impact of managerial incentives on bank risk-taking through board structure. Finally, the results provide a platform from which to view the various policy implications raised by the thesis.
In analysing the extent to which distance to default is explained by bank risk fundamentals, it is shown that distance to default is predicted marginally better in sub-debt banks relative to non-sub-debt banks. For banks that issue sub-debts, again, it is found that charter values and bank capitalisation further increase the power of bank fundamentals to predict default risk. Turning to bank risk-related variables, capital to assets and non-performing loan ratios negatively and positively affect managerial ownership, respectively. This evidence is new. The percentage of independent directors is positively related to capital to asset and liquid asset ratios, and negatively related to the non-performing loans ratio. Capital to assets and non-performing loan ratios have an observed positive and negative correlation with the percentage of institutional ownership. Also, excessive risk-taking is evident in ex-ante and ex-post Sarbanes and Regulation and linked to board size. With respect to managerial incentives, equity- and cash-based compensation is positively related to bank risk. Finally, while leverage varies directly with stock options, it is inversely associated with cash compensation.