Three essays on corporate governance and firm risk-taking & performance outcomes

Abstract

The recent global financial crisis has drawn the attention of corporate stakeholders including scholars to re-examine the role of corporate governance practices across entities. Specifically, policymakers questioned the extent to which bank corporate governance practices and the failure of the boards to monitor executives may have led to excessive risk-taking and consequently financial instability. On this account, this thesis set out to investigate the role of Governance configurations in determining the outcomes pertaining to contemporary issues in the corporate world: performance and risk-taking considerations. A careful review of the extant research addressing the relationships between bank board governance mechanisms and performance in the context of the agency theory demonstrates little consistency in results. Specifically, neither board size, independence, female directorships, board leadership structure nor monitoring exerted by institutional owners has been consistently linked to bank performance. In an attempt to resolve the prevailing inconsistencies, Chapter 1 of this thesis theorize an institutionally embedded agency viewpoint to undertake a meta-analysis of 47 empirical studies of bank board composition and their relationship to performance. Aside from our results providing aggregate evidence of a systematic association between board independence, female directorship and bank performance, the theoretical upshot of our analysis is provocative. That is, agency theory alone cannot fully capture the dynamics of bank performance, and that it must be integrated with an institution-based view. Consequently, the study concludes congruence between its findings and the recent crusade by governance scholars (Rediker &Seth, 1995; Oh et al., 2016) to assess organizational outcomes on the rubric of governance mechanism bundles. Hence, as a recommendation for future studies and foundational to our methodological and theoretical designs in the subsequent chapters, we focus on the bundles of governance mechanisms to aids our deeper understanding of the corporate governance effect on bank-risk taking and corporate tax management practices. The second essay focuses on the bundling effects of internal and external governance mechanism on a critical subject for which banks were considered pivotal during the crisis: systemic risk. Using a sample of large European banks from 2000 to 2016, this chapter analyzes how monitoring by institutional investors complements or substitutes various board-level governance mechanisms in determining a bank’s systemic risk taking. The findings largely show that external (institutional ownership) and internal (board level) governance mechanisms complement each other to determine systemic risk among sample domestic systemically important banks. Our results are robust to other econometric specification of systemic risk and additional controls. The most important implication of this chapter is the support for the concept of “equifinality”, which informs practitioners of the strategic flexibility in terms of configuring their corporate governance structures to attain similar levels of systemic risk. The essay in Chapter 3 is motivated by the view of Hanlon and Heitzman (2010) that describes corporate tax avoidance as a risk-taking activity with returns commensurate with the aggressiveness of the strategy. Based on this premise, I investigate if the prevailing governance mechanisms determine the roles of CSR committee either as an ethical or risk management structure. We test our conjecture using a global cross-industry sample of firms for the years 2002-2015. By integrating the agency with the legitimacy and corporate culture theories, I show that the CSR committee is mostly a risk management tool for firm legitimization. This consequently facilitates the balancing of stakeholder interests to subtly emphasizes a new role of the board of directors opined by the stakeholder theory.