Banking industry is unique in having more regulators than most other industries. The fact that any major failure in the industry could lead to common detriment has forced the regulators to closely monitor banks and their performance as compared with most other industries. For example, banks' deposit insurance premiums are closely related to their CAMELS (Capital, Asset quality, Management, Earnings, Liquidity and Sensitivity) ratios. One of the factors in the CAMELS evaluation components is the management of a bank. It is analyzed by considering several factors such as technical competence, administrative capabilities and internal controls. Further, due to the regulatory liberalizations in the 1990s the banking industry, especially smaller banks, began facing a new set of challenges and market. These regulatory changes and the recent Sarbanes-Oxley Act have led to a greater importance of corporate governance structures and controls as mechanisms to ensure banks' profitability and performance.
In the present study, we examine if the overall corporate governance structures of banks influence the stock returns. We also examine the relation of four major sub-components of corporate governance structures: board mechanism, compensation structure, takeover defense mechanism and audit committee structure. For these analyses, we use the data from Institutional Shareholder Services (ISS) Corporation. We also examine the differences between large and small banks based on the size of their market-equity value to see if small banks differ from large banks in their governance structures and stockholder returns. We find that large banks have better governance structures than small banks and that factors influencing stock returns vary with the size of the banks.
|
