The effect of corporate governance on banks' performance during 2007-2009 financial crisis

Abstract

Purpose – the purpose of this research is to examine the effect of ownership structure on the profitability and performance of U.S. banks. It resides in inspecting the power of insiders as well as institutional shareholders and large block-holders on bank’s performance and valuation of US commercial banks during the financial crisis of 2007-2009. Finally, it studies the relation between different factors such as bank size, market value and price earnings ratio and the ROA, ROE, and MTBV of U.S. banks. Research question – this paper aims to study the impact that ownership structure has on the performance of banks during the period of the financial crisis of 2007-2009. The main hypothesis is that ownership concentration ill have a major impact on firm performance. Design/methodology/approach – a sample of 98 U.S. banks representing the secondary data was collected from DataStream and divided into two periods; one from 2002-207 and the second from 2007-2009. After collecting data, it was imported to EViews in order to statistically analyze them. A regression analysis was performed using six different models to be able to answer the research question. Findings – findings obtained show that the concentrated ownership has a negative influence on banks’ profits and valuation during crisis. In addition, the more the increase of valuation to fundamentals, MTBV, the more destructive will the effect of high closely held shares be. However, when the bank size is bigger, the bad effect showed less. Research limitations – while performing the research, there was a time constraint which caused the data not to be collected manually. Thus, if our sample was larger, it might have ensured being more representative of the population and could have made our findings generalized. Further research – further research might deal with other aspects of corporate governance, such as audit committee independence and board independence. Second, studies on different time periods covering other crises might be suitable to evaluate the reliability of the derived results. Third, it can be extended to cover a wider range of international panel data to analyze the ownership concentration effect on global markets with different regulations and policies.