Board structure Ownership structure and Firm performance: Evidence from

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profil-zyak-2012 - Christophe Hurlin

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Board structure, Ownership structure, and Firm performance: Evidence from Banking* Mohamed Belkhir+ Laboratoire d'Economie d'Orléans, University of Orléans - France This version April 15th, 2005 Abstract This paper examines the interrelations among five ownership and board characteristics in a sample of 260 bank and savings-and-loan holding companies. These governance characteristics, designed to reduce agency problems between shareholders and managers, are insider ownership, blockholder ownership, the proportion of outside directors, board leadership structure, and board size. Using two-stage least squares regressions, we present evidence of interdependencies between board and ownership structures. The results suggest that banks substitute between governance mechanisms that align the interests of managers and shareholders. Banks with higher insider ownership rely less on outside directors' representation on their boards, are less likely to have a CEO who is also the chairman of the board, and have larger boards. In addition, banks with larger boards rely more on outside directors' representation on their boards. These findings suggest that cross-sectional OLS regressions of bank performance on single governance mechanisms may be misleading. Indeed, we find statistically significant relationships between performance and insider ownership and blockholder ownership when using OLS regressions. However, these statistically significant relationships disappear when the simultaneous equations framework is used. Together, these findings are consistent with optimal use of each governance mechanism by banks.

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Publié par	profil-zyak-2012
Nombre de lectures	23
Langue	English

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Board structure, Ownership structure, and Firm performance: Evidence from

Banking

Mohamed Belkhir

Laboratoire d’Economie d’Orléans,

University of Orléans - France

This version April 15

, 2005

Abstract

This paper examines the interrelations among five ownership and board characteristics in

a sample of 260 bank and savings-and-loan holding companies. These governance

characteristics, designed to reduce agency problems between shareholders and managers,

are insider ownership, blockholder ownership, the proportion of outside directors, board

leadership structure, and board size.

Using two-stage least squares regressions, we

present evidence of interdependencies between board and ownership structures. The

results suggest that banks substitute between governance mechanisms that align the

interests of managers and shareholders. Banks with higher insider ownership rely less on

outside directors’ representation on their boards, are less likely to have a CEO who is also

the chairman of the board, and have larger boards. In addition, banks with larger boards

rely more on outside directors’ representation on their boards. These findings suggest that

cross-sectional OLS regressions of bank performance on single governance mechanisms

may be misleading. Indeed, we find statistically significant relationships between

performance and insider ownership and blockholder ownership when using OLS

regressions. However, these statistically significant relationships disappear when the

simultaneous equations framework is used. Together, these findings are consistent with

optimal use of each governance mechanism by banks.

Key words:

Corporate governance, board structure, ownership structure, performance,

banking, simultaneous equations

JEL classification:

G21, G32, G34

This paper was written while I was a Fulbright visiting scholar at the FIREL department of the University

of North Texas. I am grateful to Christophe Hurlin and Mazhar Siddiqi for helpful comments and to Jean-

Paul Pollin for his guidance and support. I would like also to thank Mickael Braswell, James Conover and

other faculty and staff for their hospitality and helpfulness. Naturally, any remaining errors are my own.

Attaché Temporaire d’Enseignement et de Recherche. Laboratoire d'Économie d'Orléans. Faculté de

Droit, d'Économie et de Gestion. Rue de Blois - B.P. 6739 45067 - Orléans Cedex 2 – France.

Tél : +(33) (0) 2 38 41 70 37. Fax : +(33) (0) 2 38 41 73 80.

1.Introduction

The separation of ownership and control in publicly held corporations induces

conflicts of interest between managers and shareholders (Berle and Means, 1932).

Shareholders are interested in maximizing the value of the firm, but managers’ objectives

may also include the increase of perquisite consumption and job security. A number of

governance mechanisms may help aligning the interests of managers with those of

shareholders. This includes equity ownership by managers (Jensen and Meckling, 1976),

by outside blockholders (Kaplan and Minton, 1994) and executive compensation

(Mehran, 1995). In addition the board of directors may play a central role in monitoring

managers (Fama, 1980). Board size, board composition and the leadership structure of

the board are important characteristics that affect the effectiveness of the board in

monitoring management (Jensen, 1993).

The role of ownership structure (Morck et al., 1988, and McConnell and Servaes,

1990) and board structure (Baysinger and Butler, 1985; Rechner and Dalton, 1991;

Yermack, 1996, and Eisenberg et al., 1998, and Bhagat and Black, 2002) in monitoring

management and so improving firm performance has been largely investigated in

empirical corporate governance literature. While the results are mixed the approach used

in studying the relation between governance mechanisms and firm performance is mostly

the same. Underlying these studies on the effect of ownership and board structure on

performance is the assumption that there is an optimal ownership and board structure

which is common to all firms, and that firms which diverge from the optimal level of

these characteristics will experience lower performance.

The alternative view is that several governance mechanisms, among which

ownership structure and board structure, are available at the same time, and that they are

endogenously determined according to the costs and benefits of each. The costs and

benefits of each governance mechanism may vary across firms, making the use of one

more attractive to one firm than to another. Each mechanism will be thus used by each

firm up to a level where the marginal benefit equals the marginal cost. Consequently,

optimal corporate governance structures vary across firms, and result in equally good

performance. Under this view there will possibly be no empirical relationship between

ownership and board structure and performance. Studies that have adopted this approach

include Demsetz and Lehn’s (1985) investigation of the determinants of ownership

concentration, Himmelberg et al.’s (1999) investigation of the determinants of managerial

ownership, Hermalin and Weisbach’s (1991) investigation of the interaction between

board composition and insider ownership and their effect on performance, and Cho’s

(1998) study of the interactions between managerial ownership, investment and corporate

value. Agrawal and Knoeber (1996) and Mak and Li (2001) adopt the same approach but

work with a more complete set of governance mechanisms. In banking, this approach has

been adopted by a number of authors, among whom Schranz (1993) and Booth et al.

(2002) who look at the effect of the presence of regulation in the banking industry on the

use of other corporate control mechanisms, designed to provide managers with incentives

to maximize firm value. Schranz (1993) looks at the effect of the restriction of takeover

activity in some states on the use of other corporate control mechanisms, such as the

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