“The banking sector: destination unknown”
by
Niek C. ter Haar
University of Groningen
Faculty of Economics & Business
MsC International Business & Management
“The banking sector: destination unknown”
By Niek C. ter Haar
Abstract
This research deals with the relationship between corporate governance and performance in the banking sector. The two distinct characteristics of banks, high government
“The issue which has swept down the centuries and which will have to be fought sooner or later, is the people versus the banks”.
There we have it. The last hurdle before graduation has been taken. I would lie if I would say that it was an easy ride. Writing and finishing this thesis took me just under a year. A year wherein I had surgery, spent a month in Thailand, switched supervisors, got frustrated with the lack of progress, and where I had to force myself to ‘keep my eyes on the ball’.
However, with a bit of perseverance and some good support around me I was able to round it up. My thanks go to my supervisor, dhr. Ritsema, who helped me from January onwards in making this research as good as possible.
Table of content
Summary………6
1. Background and introduction……….………7
1.1 Background………..……….7
1.2 Introduction………….………….……….7
1.3 Research overview………..………..9
2. Literature review………..………...10
2.1 Corporate governance across the globe………..10
2.2 Underlying theories corporate governance……….………11
2.3 Information asymmetry……….………..12
2.4 Corporate governance and performance………….………13
2.5 Corporate governance of banks……….…………..13
3. Hypotheses……….…...15
3.1 Private monitoring……….………..15
3.2 Board size……….…………...17
4. Methodology……….19
4.1 Statistical tool………..19
4.2 The dependent variable………...19
4.3 The independent variables………..19
4.4 The regression model………..20
4.5 Sample……….20
5. Results………...22
5.1 Descriptives private monitoring……….…….22
5.2 Private monitoring and performance……….………..23
5.3 Descriptives board size……….…..25
5.4 Board size and performance……….………...25
6. Discussion and implications……….……….28
7. Limitations……….…...29
8. References……….………30
Summary
In this research, the corporate governance of international banks is discussed. This concept has been subject of debate for the last decade and received special interest duo the current financial crisis. The banking sector has a great influence on the global economy. The sector is described in research as an extraordinary business sector due to two specific characteristics. Firstly, information asymmetry plays a more important role than it does in other business sectors. Secondly, the role of the government through regulation, supervision and other forms of involvement is much more severe than in other sectors.
These two characteristics are used to derive two variables for research. Board size was selected to deal with the opaque character of the banking sector. One of the key
responsibilities of the board of directors is control a firm’s operation for the shareholders, thereby closing the gap in information between shareholders and firm. Secondly, private monitoring was selected as the variable to take the high government involvement in the sector into account. Private monitoring can be defined as the degree to which market forces control the bank’s actions. The variables are tested on a significant relationship with two financial performance indicators, Return on Equity (ROE) and Return on Assets (ROA), with the use of regression analysis. It is hypothesized that a high degree of private monitoring in a country is positively related to bank performance. Next to this, this research hypothesizes that board size is negatively related to bank performance. A sample of 90 banks has been drawn from
countries from both Anglo-Saxon and Continental-European countries to grasp the broad context of corporate governance.
1. Background and introduction
1.1 Background
In the business setting, banks take a central place. Not only due to their unique function within the entrepreneurial environment, but due to their specific organizational aspects as well. Over the past two years, banks across the globe have started to feel the emergence of an international banking crises. The so-called sub-prime activities of US banks led to a huge amount of bad loans and loss of bank credibility. This crisis, which started out as a US affair, spread like an oil stain around the globe due to the mutual investments of banks. During the current financial crisis, the role and governing of banks is under heavy criticism. Over the last three months, more and more banks in the US and Europe are being taken over by their national governments to prevent a complete meltdown of the (inter)national financial markets. A lot of public debate is taking place about the governing of banks in order to learn lessons for the future.
1.2 Introduction
Polo (2007) highlights the special nature of banks. She argues that the banking sector is more opaque and has a higher degree of government involvement, compared to other sectors in the business environment. These special characteristics are used to determine two variables for research. Private monitoring is determined as the variable dealing with the high degree of government involvement in the banking sector. This variable is a particularly interesting variable to discuss as there are contra-dictionary views on private monitoring now during the financial crises, compared to a view developed in research several years back during a period of relative stability in the international financial framework.
In their research, Caprio, Levine and Barth (2006) give a first attempt at measuring
performance with relation to government supervision. In their conclusions, the authors state that: “First, regulatory and supervisory strategies that promote private sector forces work. Countries with policies that promote private monitoring of banks have better bank
Secondly, with use of the opaque characteristic of the banking sector, the size of the board of directors is determined as a second variable for research. Opaqueness is related to the board in a way that it hampers the control on the management by the stakeholders. Furthermore, a single board characteristic can be an effective measure of corporate governance, according to Bhagat & Bolton (2008), on both economic and econometric grounds.
In the current financial crisis, the boards of banks face criticism for not having performed their duties properly. Even the integrity of several bank CEO’s has been questioned. It is therefore interesting to have a closer look at the size of the boards of international banks. Agency models suggest that large boards have a negative effect on corporate value (Bhagat & Bolton, 2008). However, does this hold for the banking sector with a higher degree of
information asymmetry and opaqueness?
This research strives to make contributions to the debate about the corporate governance of banks by providing renewed insights on the current debate. The aim is to provide ‘best practices’ for these particular variables and help shape the future of the corporate governance of banks. In other words: in what direction should the corporate governance of banks
develop? In order to facilitate this, the following research question has been formulated.
In this conceptual framework, the different concepts and variables for research are clearly shown. It is argued, that there is a relationship between the corporate governance of banks and corporate performance, through these two specific variables: board size and private
monitoring. These two variables both can be placed in the area of information asymmetry. Both private monitoring and board size, serve in this research to close the gap in information between stakeholders and the bank itself and therefore resulting in better bank performance.
1.3 Research Overview
This research will start with a literature review to set the context of the research. The review is dealing with all the important theoretical aspects of corporate governance. The concept of corporate governance will be explained and the main models of corporate governance around the world will be discussed. Next to this, underlying theories like the agency theory, and important aspects as information asymmetry will be dealt with. Following this, the place of corporate governance in the banking sector and its implications will be discussed. The special nature of the banking sector will be used to determine the variables on which this research is based. With use of this perspective, the hypotheses to facilitate further research will be derived from the literature. These hypotheses concern the variables board size and private monitoring. After this, the hypotheses will be statistically tested with use of (multiple) regression analysis. Finally, conclusions will be deducted from the statistical analysis and implication for further research will be made.
2. Literature review
Corporate governance has been a major topic of debate in the last decade. In order to understand the concept of corporate governance, first a closer look has to be taken at what corporate governance aims to do. In general, corporate governance concerns “the structure
rights and responsibilities among the parties with a stake in the firm” (Aoki, 2000: 11) and
deals with the ways in which suppliers of finance to corporations assure themselves of getting
a return on their investment” (Shleifer and Vishny, 1997). Despite this definition, some
researchers argue that the diversity of practices around the world nearly defies the proposition of a common definition (Aguilera and Jackson, 2003).
2.1 Corporate governance across the globe
However, reviewing the literature, man can argue that both models do contrast two different viewing points to corporate governance. The distinction between the models is clear about the representation of the shareholder view (Anglo-Saxon model) and the stakeholder view
(Continental European model).
The levelling of this distinction is, according to Aguilera & Cuervo-Cazurra (2004), the reason behind the current focus on corporate governance is caused by two related processes. On the one hand the globalization and liberalization of economies and capital markets and on the other hand the changes in firm ownership. These changes of firm ownership are shown by privatization, rising shareholder activism and a growth of institutional investors (Aguilera & Cuervo-Cazurra, 2004). These two processes result in a higher degree of complexity in the business environment. Therefore they provide the incentive for more effective monitoring mechanisms to withstand the current challenges in corporate governance.
2.2 Underlying theory of corporate governance
To further understand the background of corporate governance, it is important to discuss its theoretical foundation. The underlying theory for corporate governance is known as the agency theory. Agency theory refers to a relationship in which a party (the principal)
Within the banking environment, two kinds of agency relationships, namely depositor–bank and bank–borrower, can be found. In both these relationships, agency problems can occur. The agency theory recognizes two kinds of problems within agency relationships: adverse selection and moral hazard. The first problem occurs when the principal can observe the agent’s actions, but is incapable to make out whether this is the optimal behaviour. This is described as a monitoring problem by Mitnick (1987) and Eisenhardt (1988).
The risk of moral hazard is the second problem. It occurs when the principal is able to recognize optimal behaviour, but is not in the position to observe it. This problem can be described as an incentive problem, as the best way to make sure the agent is performing optimally is to offer him the right incentives (Mitnick, 1987; Kurland, 1991).
Finally, Kurland (1991) states that a trade-off can be found between the costs of monitoring the agent’s behaviour (to deal with adverse selection) and the need to achieve an optimal output (to deal with moral hazard) in a situation of information symmetry.
2.3 Information asymmetry
As pointed out above, the problem of information asymmetry takes a central place in the corporate governance debate of banks. There are a few scenarios in which this concept creates a problem. First, the information asymmetry within the savings market means that the
depositors cannot assess individual banks’ capital strength or the bankruptcy probability of a bank (Miles, 1995). On the other hand, in credit markets, banks may be unable to monitor the borrowers’ behaviour and therefore be unable to critically assess the real risk to an investment project which can result in bad loans (moral hazard; Martin and Smyth, 1991).
In a situation of perfect information, market forces would enforce proper banking practices because profit-maximizing banks would favour strategies with zero probability of bankruptcy as they would be able to take all necessary information into consideration when they assess the risks to their projects (Kareken and Wallace, 1978). In other words, a future task lies in closing the information gap between stakeholders of the bank and the bank itself, thereby lowering the possibility of moral hazard and adverse selection phenomena.
2.4 Corporate governance and performance
Having discussed the underlying principles of corporate governance and its implications, a negative or positive influence of corporate governance on corporate performance clearly comes to bear. A number of researchers have reviewed and discussed this relation.
Claessens (2003) discusses the ways through which corporate governance affects growth and development. He states that corporate governance influences this through increased access to external financing by firms, lower cost of capital and associated higher firm valuation, better operational performance through better allocation of resources and better management, reduced risk of financial crises, better relationships with all stakeholders.
Furthermore, Bhagat and Bolton (2008) discovered more statistical evidence that a significant relationship between performance and corporate governance exist. They found in their
research statistical evidence that a 1% improvement of governance is associated with a 0.854% change in operating performance of the firm.
2.5 Corporate governance of banks
In light of the corporate governance debate, the banking sector takes a special place. Caprio and Levine (2002) are the first that have specifically researched the corporate governance of banks. They discuss in their work two specific features which makes corporate governance of banks special in their opinion. Firstly, in general banks are more opaque than nonfinancial firms. Information asymmetry plays a more important role in the banking sector than it does in other sectors (Furfine, 2001; Polo, 2007). Furthermore it is argued that the banking sector has to deal with severe government regulation in comparison to other sectors within the business environment (Caprio and Levine, 2002; Polo, 2007).
Moreover, this opaqueness makes it easier and more likely for managers and large investors to manipulate boards of directors and exploit the private benefits of control. Specifically, opaqueness enhances the ability of bank insiders to shift the activities of the bank quickly and massively for the own gain and at the cost of other stakeholders in the bank (Polo, 2007). From this specific situation in the banking sector, the first independent variable is derived: board size.
Finally, the grip of governments on the banking sector is far more severe compared to other sectors of commerce. The idea behind this government involvement concerns a safety net, considering the importance of a healthy banking sector for a national economy. Furthermore, many governments fear that a bank’s private governance arrangements, including its
3. Hypotheses
In this chapter, the literature discussing governmental influence and board size in the banking sector will be reviewed. In the end of both paragraphs, several hypotheses will be formulated to accommodate further empirical analysis.
3.1 Private monitoring
Throughout literature, the special nature of banks and the degree of government involvement within the banking sector is highlighted (Levine 2003; Polo, 2007). Some researchers even argue that the severe government involvement within the banking sector weakens traditional corporate governance mechanisms (Levine, 2003). Government supervision is furthermore an important variable to discuss as there are contra-dictionary views on government supervision now during a period of financial crises, compared to a view developed in research several years back during a period of relative stability in the international financial framework. Polo (2007) sets out the two arguments which are usually presented to justify bank regulation: depositor protection and systemic risk. Furthermore, she states that the role of central banks as lenders of last resort and schemes of deposit insurance are the commonly used instruments which governments issued to prevent bank runs, contagion, and other strains of systemic risk. Moreover, Polo (2007: 7) states that “the highly regulated nature of banking empowers the regulatory authorities to influence, or even dominate, the corporate governance of banks”. Prowse (1997) has even concluded that the single most important corporate control mechanism in the banking sector is regulatory intervention.
In their research, Caprio, Levine and Barth (2005) give a first attempt at measuring
performance with relation to government supervision. In their conclusions, the authors state that: “First, regulatory and supervisory strategies that promote private sector forces work. Countries with policies that promote private monitoring of banks have better bank
performance and more stability” (Caprio, Barth & Levine, 2005: p30). These practices are based on the private empowerment theory. Levine (2003: p3) states: “this theory suggests that “bank supervisory strategies should (1) focus on enhancing the ability of private agents to overcome informational barriers and exert corporate control over banks and (2) not assume too much power”.
He furthermore describes how the theory enhances the power of independent supervisory agents to force accurate information disclosure in order to improve bank monitoring by the market. This will enhance bank managers’ incentives to allocate capital based on efficiency considerations (Grossman and Hart, 1980). Government supervisory agencies are furthermore linked to an increase in corruption in lending, according to Beck et al (2007).
Combining these insights, a market perspective of monitoring can be derived as the best alternative for influencing corporate governance. Therefore, it is hypothesized that the performance of banks in countries with a higher degree of private monitoring is better than in countries with a relative low degree of private monitoring. Further evidence for these earlier findings is expected to be found, despite the emergence of the financial crisis in an Anglo Saxon country.
Hypothesis 1A
The performance of banks in the UK and Australia is positively related to the degree of private monitoring in those countries.
Hypothesis 1B
3.2 Board size
Next to the governmental influence within the banking sector, a fair concern has been
expressed in literature that internal governance mechanisms may stifle growth and innovation (Mayer, 1997). One of these internal governance mechanisms concerns the board of directors and in particular the size of the board of directors. In this chapter we will review this
mechanism and formulate a hypothesis for further testing.
In economic and strategic management literature such as Jensen (1993), boards are considered as the institutions to mitigate the effects of agency problems existent in the organizations. These agency problems emerge through the separation of ownership and control of the corporation and concede of imperfect and asymmetric information, as is described in the previous chapter (Jensen and Meckling, 1976; Jensen 1993). Through this separation, corporate boards have the power to make, or at least ratify, all important decisions including decisions about investment policy, management compensation policy, and board governance itself (Bhagat & Bolton, 2008). As boards are considered to be large decision-making groups, size can affect the decision-making process and effectiveness of the board (Selvam, Raja & Kumar, 2005).
Next to this, several researchers argue that through agency costs, board size and corporate performance are related to one another (Lipton & Lorsch; 1992; Jensen, 1993). Moreover, Yermack (1996) found that corporate performance depends to a large extent on the quality of decision making and monitoring by the board of directors. Bhagat and Bolton (2008) even argue that board size as a single characteristic, can be an effective measurement of corporate governance. As a result, board size is potentially an important determinant of corporate performance.
Hermalin and Weisbach (2001) take a social psychological view on the matter and take group dynamics into consideration. They argue that larger boards are vulnerable to problems of diffusion of responsibility or social loafing. Individual board members are less likely
discovered when their contribution are not up to standard. Furthermore, larger board size may also make it difficult for the members to use their knowledge and skills effectively due to problems of coordinating the contributions. The board thus becomes more symbolic and less a part of the management process (Hermalin &Weisbach, 2001). This point of view is also used by Lipton and Lorsch (1992). They found in their research that 'the norms of behaviour in most boards are dysfunctional and argue that where the number of executives on the board increases, the problems associated with these norms of behaviour also increase. This increase in problems largely arises from a reluctance to hold open and candid discussions about key executive decisions.
However, more research is necessary to test these findings in the setting of the banking industry where the information streams are much more opaque, and where the government has such a substantial amount of influence. Therefore, combining the insights given above, the following hypothesis is formulated.
Hypothesis 2
4. Methodology
In this chapter, the methodology applied in this research will be discussed. Next to this, the dependent and independent variables will be set out and the regression model formulated. Finally, the sample, its build up and size are determined.
4.1 The statistical tool
Multiple regression analysis is the best tool to determine whether there is a relationship between de dependent and independent variables. In this case performance of banks on the one hand, and the corporate governance characteristics on the other hand. The work of several researchers on the relationship of corporate governance and firm performance will be mainly followed and applied to the banking sector.
4.2 The dependent variables
The following performance indicators will be used to measure the performance of the banks and are as such, the dependent variables in the research:
- Return on Equity (ROE) - Return on Assets (ROA)
These performance indicators are selected with use of the work of several researchers. De Jong et al. (2003) state that ROE and ROA are commonly used financial ratios measuring profit and cost performance in comparable studies. This view is shared by a wide variety of researchers (e.g. Hitt, Hoskisson & Kim, 1997; Brown & Caylor, 2009). Return on assets is defined as income before extraordinary items divided by total assets . Return on equity is defined as income before extraordinary items available for common equity divided by the sum of the book value of equity and deferred taxes (Brown & Caylor, 2009).
4.3 The independent variables
In the analysis, the independent variables will be formed by corporate governance characteristics. The first independent variable deals with the role of the government in
The types of corporate governance matching with the companies will be scored by a 1 (high degree of private monitoring) or a 0 (low degree of private monitoring). The choice has been made for dummy variables as the degree of government supervision is nearly impossible to grasp in a percentual statistic. The work of Barth, Caprio and Levine (2001) will be used to classify the countries involved.
The second independent variable deals with the opaqueness of banks and concerns the board size of the firms. The work of Jensen (1993) is followed in narrowing this variable down. Board size will be determined through the number of members in the board of directors (or supervisory board) of a bank. As Jensen (1993: 862) remarks: 'The board, at the apex of the internal control system, has the final responsibility for the functioning of the firm'
4.4 The regression model
The overall regression model is as follows for the main hypothesis: y = β0 + β1x1 + β2x2 + e
y = β0 + β1x1 + β2x2 + e
PerformanceROA = β0 + β1govsup + β2boardsize + e PerformanceROE = β0 + β1govsup + β2boardsize + e
4.5 Sample
These countries are selected using the research of Barth, Caprio and Levine (2001). These researchers state that the countries are positioned in the higher and lower regions of countries in the field of private monitoring of banks.
5. Results
In this chapter, the results of the statistical analyses will be discussed. Firstly, the results of the analyses concerning the variable of private monitoring are reviewed.
5.1 Descriptives private monitoring
Before the actual regression analyses are discussed, first a look will be taken at some more general information which the collected data provides. The mean value of the ROE in the UK, USA and Australia is slightly higher than the mean value measured in France, Belgium, Germany and the Netherlands (from here after: Anglo-Saxon countries versus Continental-European countries). The mean value of Anglo-Saxon countries is 8,77 versus 7,46 in the CE countries. When the mean value of the ROA of the banks are compared, the Anglo-Saxon banks have a higher score as well: 0,39 versus 0,32.
Furthermore, it is interesting to have a look at the reach of the mean values. For both financial indicators, Anglo-Saxon banks have the lowest bottom value. For ROE, the Anglo-Saxon banks have the highest maximum value as well. The reason of the lowest bottom value lies in the emergence of the financial crisis in Northern America. The data used in this research stems from July 2008. At that time, the crisis was already causing havoc on multiple American and UK banks and slowly seeping through to Europe. The CE banks have
participations and investments in these banks and therefore the bottom result found for these banks account negative values as well.
Anglo-Saxon banks CE banks
5.2 Private monitoring and performance
In this paragraph we will discuss the results regarding the regression analyses for private monitoring and bank performance. These results consider the database as a whole, both Anglo-Saxon and CE banks.
These are the results of the regression analysis on performance indicator ROE and private monitoring. As is shown in the table below, there is no significant relationship between the two variables as measured in this research.
Next to the non-significant outcome of the analysis, the regression equation as a whole scores low on all reliability measurements. The R square shows that only 0,2% of the variance in ROE is explained by private monitoring.
When we take a look at the results measured for ROA, there is a consistency with the results in the ROE-analysis. This is shown in the next table. Again, we find low reliability values and a non-significant relationship between the two variables. Although every value is slightly better than in the analysis with ROE as performance indicator, it is still nowhere near an acceptable significance level.
Value
R square ,002
T ,375
F ,140
If we take the results of these two analyses into consideration, it is safe to say that there is no significant relationship, either positive or negative, between corporate performance of banks and the degree of private monitoring in a country, as measured in this research. Therefore, both hypotheses 1A and 1B are rejected. This is contra dictionary to the results which Barth, Caprio and Levine (2006) found in their research on this matter. A difference may lie in the fact that their research mostly took place in developing countries, where the financial system is not nearly as internationalized as in the developed countries in this research. The
institutional framework of developing countries has not matured enough yet to fulfil a stable role as supervisor. These developing economies often hamper with negative government impulses such as corruption.
Next to this, it is plausible that due to the intense complexity of the operations and structure of financial corporations, the degree of private monitoring in fact does not take an important role as a corporate governance mechanism. Both government or market forces can monitor the bank’s activities but are unable to make out whether all the activities are risk-prone or not. This way, the monitoring is fruitless and does not have an impact on the performance of banks. This point of view is shared by a number of researchers, who agree on the statement that monitoring bank performance requires special and intense knowledge of banking and the mechanics on financial markets (Goodhart, 2002).
Value
R square ,003
T ,540
F ,291
5.3 Descriptives board size
The table below contains some descriptive results concerning the mean board size of the banks in our database. It shows that the board size of CE banks is larger, on average, compared to the Anglo Saxon banks. This is similar to the results which Conyon and Peck (1998) found in their research on board size and corporate performance on small and medium-sized firms. However, it is noticeable that they found lower averages for both type of
countries. The higher average board size found in our sample can be caused by the complexity of the banking sector (Coles, Daniel and Naveen, 2004).
When these descriptives are combined with the means of the performance indicators, a preliminary conclusion is that a smaller board size leads to better performance. However, to confirm this, the tool of regression analysis is deployed to determine whether there is a significant relationship between performance and board size. In the following paragraphs these results will be discussed.
5.4 Board size and performance
Below is the table with the results of the regression analysis performed on the relationship between ROE and board size.
These results imply that there is no significant relationship between board size and ROE. The output shows considerable better values compared to the analyses with private monitoring as independent variable. However, the significance level is still lower than the minimal accepted alpha of 0.10.
Following the previous analysis, the relationship between ROA and board size is examined. Here, the regression analysis between ROA and board size shows a significant positive relationship between these two variables at a 0.10 alpha.
This is a very interesting result if we take our hypothesis into consideration. We expected a significant negative relation between board size and performance. This analysis shows the opposite result. There are a few insights which can help explain these findings.
First, these results are consistent with the findings of a few researchers. Coles, Daniel and Naveen (2004) show that the negative board size effect does not hold for firms with complex operations. A large, international bank is undoubtedly a firm with very complex day-to-day operations. The underlying theory is that due to the complex information streams, more directors are needed to manage these streams in an effective manner to reach an optimal degree of internal supervision. Moreover, this point of view is shared by Adams and Mehran (2005). They found a positive board size effect for US banking firms.
Value
R square ,031
T -1,668
F 2,781
6. Discussion and implications for further research
Even thought the current financial crisis is not over, debate has risen over its causes. This research has examined the relationship between one of the main points of debate, private monitoring of banks, and corporate performance. There was no significant relationship between the two variables as measured in this research. This leads to a number of insights and possible explanations for the current situation. Firstly, man can argue that there is not really a country border with regard to corporate governance. Corporate governance in the banking sector has become a supra-national concept with the intertwining and globalization of the financial markets. The sheer size and complexity of the financial activities of a global bank is hardly manageable or controllable by means of national supervision. This earlier mentioned intertwinement of the financial markets makes the possibility of a financial crisis an
international concern and strengthens the urge for supranational supervision.
On the other hand, man can argue that this research has not reviewed the majority of the possibilities and that the role of government monitoring can be grasped in other ways as well. I suggest to divide the role of the government in the banking sector in several measurable and well-defined variables and start to examine these at the national level first. If these results should provide with any new insights or relations, this can be extended to a broader, international context.
Next to this, this research has found evidence of a positive significant relationship between board size and corporate performance. These findings are consistent with earlier research on complex business sectors and therefore it is plausible to say that internal corporate
Furthermore, there is still room for further research with regard to board size. It could prove interesting to match banks with a certain level of complexity (for example: number of countries active) to an optimal range of board size. By doing so, moving the debate even further towards a debate on factual ‘best practices’.
7. Limitations
There are several aspects which need to be taken into consideration and which count as limitations to this research. Firstly, the financial data which is gathered stems from a moment in time in which the current financial crises already emerged in Northern-America. As many of the large US financials are highly active in the United Kingdom and the intertwinement of these financial markets is very high, man can argue that this data is ‘polluted’. This accounts to a lesser, but still significant, degree for the Continental European countries as well as large global banks often participate in each other’s investment vehicles. Several researchers such as Eichengreen (1998) and Gianetti (2003) have recognized and discusses these risks of
contamination in times of financial crises in their work. While the data in this research is polluted, the final results may therefore not be as accurate as they would be in a non-crisis period of time.
Furthermore, in this research we have made use of dummy variables to grasp the concept of private monitoring and make it comparable across countries. It is doubtful though if such a complex concept can be operationalized in a dummy variable. This might have influenced the end results of the analysis.
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Appendix A: Statistical results
Private monitoring and ROE
Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1 ,040a ,002 -,010 16,62005
a. Predictors: (Constant), Prmon
ANOVAb
Model Sum of Squares df Mean Square F Sig.
1 Regression 38,743 1 38,743 ,140 ,709a
Residual 24307,889 88 276,226
Total 24346,632 89
a. Predictors: (Constant), Prmon b. Dependent Variable: ROE
Coefficientsa Model Unstandardized Coefficients Standardized Coefficients T Sig. B Std. Error Beta 1 (Constant) 7,461 2,478 3,011 ,003 Prmon 1,312 3,504 ,040 ,375 ,709
Private monitoring and ROA Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1 ,057a ,003 -,008 ,62510
a. Predictors: (Constant), Prmon
ANOVAb
Model Sum of Squares df Mean Square F Sig.
1 Regression ,114 1 ,114 ,291 ,591a
Residual 34,386 88 ,391
Total 34,500 89
a. Predictors: (Constant), Prmon b. Dependent Variable: ROA
Coefficientsa Model Unstandardized Coefficients Standardized Coefficients T Sig. B Std. Error Beta 1 (Constant) ,323 ,093 3,465 ,001 Prmon ,071 ,132 ,057 ,540 ,591
Board size and ROE Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1 ,146a ,021 ,010 16,45627
a. Predictors: (Constant), Boardsize
ANOVAb
Model Sum of Squares df Mean Square F Sig.
1 Regression 515,465 1 515,465 1,903 ,171a
Residual 23831,167 88 270,809
Total 24346,632 89
a. Predictors: (Constant), Boardsize b. Dependent Variable: ROE
Coefficientsa Model Unstandardized Coefficients Standardized Coefficients T Sig. B Std. Error Beta 1 (Constant) 13,085 3,997 3,274 ,002 Boardsize -,404 ,292 -,146 -1,380 ,171
Board size and ROA Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1 ,175a ,031 ,020 ,61647
a. Predictors: (Constant), Boardsize
ANOVAb
Model Sum of Squares df Mean Square F Sig.
1 Regression 1,057 1 1,057 2,781 ,099a
Residual 33,443 88 ,380
Total 34,500 89
a. Predictors: (Constant), Boardsize b. Dependent Variable: ROA
Coefficientsa Model Unstandardized Coefficients Standardized Coefficients T Sig. B Std. Error Beta 1 (Constant) ,583 ,150 3,896 ,000 Boardsize -,018 ,011 -,175 -1,668 ,099
