Corporate Governance Practices and Bank Performance: Evidence from Indian Banks
Keywords:
Corporate Governance, Board Characteristics, Performance of Banks, Indian Banking.
Abstract
The study examines the corporate governance practices and analyzes the role of the board characteristics (size of the board, the composition of the board, and functioning of the board) on the performance and asset quality of banks. We use a sample of 34 commercial banks consisting of 19 public sector banks and 15 private sector banks from 2009 to 2018 accounting for 93 percent of the total banking industry in India. The study finds that busy directors and the number of meetings have a positive significance on bank performance. The percentage of independent directors and the percentage of busy directors influence a significant negative relationship on the net non-performing assets ratio. The board size and number of meetings are associated negatively with Tobin's Q significantly and the percentage of busy directors is a significantly positive impact on Tobin's Q. The board size has a significantly negative impact on bank performance. The research findings provide some insights into corporate governance to the RBI for considering appropriate policy guidelines on corporate governance in the banking industry in India. The paper adds to the existing literature on corporate governance mechanisms and banking industry performance.
References
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Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. the Journal of Finance, 48(3), 831-880.
Kumar, N., & Singh, J. P. (2013). Effect of board size and promoter ownership on firm value: some empirical findings from India. Corporate Governance: International Journal of Business in Society, 13(1), 88-98.
Klein, A. (2002). Audit committee, board of director characteristics, and earnings management. Journal of accounting and economics, 33(3), 375-400.
Liang, Q., Xu, P., & Jiraporn, P. (2013). Board characteristics and Chinese bank performance. Journal of Banking & Finance, 37(8), 2953-2968.
Lipton, M., & Lorsch, J. W. (1992). A modest proposal for improved corporate governance. The business lawyer, 59-77.
Liu, Y., Miletkov, M. K., Wei, Z., & Yang, T. (2015). Board independence and firm performance in China. Journal of Corporate Finance, 30(C), 223-244.
Malik, M., Wan, D., Ahmad, M. I., Naseem, M. A., & Rehman, R. U. (2014). Role of board size in corporate governance and firm performance applying pareto approach, is it cultural phenomena?. Journal of Applied Business Research (JABR), 30(5), 1395-1406.
Muniandy, B., & Hillier, J. (2015). Board independence, investment opportunity set and performance of South African firms. Pacific-Basin Finance Journal, 35, 108-124.
Nguyen, B. D., & Nielsen, K. M. (2010). The value of independent directors: Evidence from sudden deaths. Journal of financial economics, 98(3), 550-567.
Pathan, S. (2009). Strong boards, CEO power and bank risk-taking. Journal of Banking & Finance, 33(7), 1340-1350.
Rosenstein, S., & Wyatt, J. G. (1990). Outside directors, board independence, and shareholder wealth. Journal of financial economics, 26(2), 175-191.
Rowe, W., Shi, W., & Wang, C. (2011). Board Governance and Performance of Indian Banks. Working Paper. University of Nebraska at Omaha.
Sarkar, J., & Sarkar, S. (2018). Bank ownership, board characteristics and performance: Evidence from commercial banks in India. International Journal of Financial Studies, 6(1), 1-30.
Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of financial economics, 40(2), 185-211.
Adams, R. B., & Mehran, H. (2012). Bank board structure and performance: Evidence for large bank holding companies. Journal of financial Intermediation, 21(2), 243-267.
Agrawal, A., & Knoeber, C. R. (1996). Firm performance and mechanisms to control agency problems between managers and shareholders. Journal of financial and quantitative analysis, 31(3), 377-397.
Ahn, S., Jiraporn, P., & Kim, Y. S. (2010). Multiple directorships and acquirer returns. Journal of Banking & Finance, 34(9), 2011-2026.
Baysinger, B. D., & Butler, H. N. (1985). Corporate governance and the board of directors: Performance effects of changes in board composition. Journal of Law, Economics, & Organization, 1(1), 101-124.
Barnhart, S. W., & Rosenstein, S. (1998). Board composition, managerial ownership, and firm performance: An empirical analysis. Financial Review, 33(4), 1-16.
BCBS. (2015). Basel Committee on Banking Supervision. Enhancing Corporate Governance for Banking Organizations.
Bhagat, S., & Black, B. (2002). The non-correlation between board independence and long-term firm performance. Journal of Corporation Law, 27(2), 231.
Cornett, M. M., Mc Nutt, J. J., & Tehranian, H. (2009). Corporate governance and earnings management at large US bank holding companies. Journal of Corporate finance, 15(4), 412-430.
De Andres, P., & Vallelado, E. (2008). Corporate governance in banking: The role of the board of directors. Journal of banking & finance, 32(12), 2570-2580.
Fich, E. M., & Shivdasani, A. (2006). Are busy boards effective monitors?. The Journal of finance, 61(2), 689-724.
Francis, B. B., Hasan, I., & Wu, Q. (2012). Do corporate boards matter during the current financial crisis?. Review of Financial Economics, 21(2), 39-52.
Francis, B., Hasan, I., Song, L., & Waisman, M. (2013). Corporate governance and investment-cash flow sensitivity: Evidence from emerging markets. Emerging Markets Review, 15, 57-71.
Fu, X. M., & Heffernan, S. (2009). The effects of reform on China’s bank structure and performance. Journal of Banking & Finance, 33(1), 39-52.
Fuzi, S. F. S., Halim, S. A. A., & Julizaerma, M. K. (2016). Board independence and firm performance. Procedia Economics and Finance, 37, 460-465.
Garg, A. K. (2007). Influence of board size and independence on firm performance: A study of Indian companies. Vikalpa, 32(3), 39-60.
García-Herrero, A., Gavilá, S., & Santabárbara, D. (2009). What explains the low profitability of Chinese banks?. Journal of Banking & Finance, 33(11), 2080-2092.
Gafoor, C. A., Mariappan, V., & Thyagarajan, S. (2018). Board characteristics and bank performance in India. IIMB management review, 30(2), 160-167.
Hermalin, B. E., & Weisbach, M. S. (1991). The effects of board composition and direct incentives on firm performance. Financial management, 101-112.
Hermalin, B. E., & Weisbach, M. S. (1998). Endogenously chosen boards of directors and their monitoring of the CEO. American Economic Review, 88 (1), 96-118.
Hermalin, B. E., & Weisbach, M. S. (2001). Boards of directors as an endogenously determined institution: A survey of the economic literature (No. w8161). National Bureau of Economic Research.
Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. the Journal of Finance, 48(3), 831-880.
Kumar, N., & Singh, J. P. (2013). Effect of board size and promoter ownership on firm value: some empirical findings from India. Corporate Governance: International Journal of Business in Society, 13(1), 88-98.
Klein, A. (2002). Audit committee, board of director characteristics, and earnings management. Journal of accounting and economics, 33(3), 375-400.
Liang, Q., Xu, P., & Jiraporn, P. (2013). Board characteristics and Chinese bank performance. Journal of Banking & Finance, 37(8), 2953-2968.
Lipton, M., & Lorsch, J. W. (1992). A modest proposal for improved corporate governance. The business lawyer, 59-77.
Liu, Y., Miletkov, M. K., Wei, Z., & Yang, T. (2015). Board independence and firm performance in China. Journal of Corporate Finance, 30(C), 223-244.
Malik, M., Wan, D., Ahmad, M. I., Naseem, M. A., & Rehman, R. U. (2014). Role of board size in corporate governance and firm performance applying pareto approach, is it cultural phenomena?. Journal of Applied Business Research (JABR), 30(5), 1395-1406.
Muniandy, B., & Hillier, J. (2015). Board independence, investment opportunity set and performance of South African firms. Pacific-Basin Finance Journal, 35, 108-124.
Nguyen, B. D., & Nielsen, K. M. (2010). The value of independent directors: Evidence from sudden deaths. Journal of financial economics, 98(3), 550-567.
Pathan, S. (2009). Strong boards, CEO power and bank risk-taking. Journal of Banking & Finance, 33(7), 1340-1350.
Rosenstein, S., & Wyatt, J. G. (1990). Outside directors, board independence, and shareholder wealth. Journal of financial economics, 26(2), 175-191.
Rowe, W., Shi, W., & Wang, C. (2011). Board Governance and Performance of Indian Banks. Working Paper. University of Nebraska at Omaha.
Sarkar, J., & Sarkar, S. (2018). Bank ownership, board characteristics and performance: Evidence from commercial banks in India. International Journal of Financial Studies, 6(1), 1-30.
Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of financial economics, 40(2), 185-211.
Published
2020-03-07
How to Cite
Bezawada, B. (2020). Corporate Governance Practices and Bank Performance: Evidence from Indian Banks. Indian Journal of Finance and Banking, 4(1), 33-41. https://doi.org/10.46281/ijfb.v4i1.502
Section
Research Paper/Theoretical Paper/Review Paper/Short Communication Paper
Copyright (c) 2020 Brahmaiah Bezawada
This work is licensed under a Creative Commons Attribution 4.0 International License.
