We empirically investigate the impact of shareholders' excess control rights (greater control than cash-flow rights) on bank profitability and risk before, during, and after the global financial crisis of 2007-2008. We use a unique hand-crafted dataset tracing the complete control chains of 788 European commercial banks and cover the 2002-2010 period. We find that the presence of excess control rights is associated with lower profitability, higher risk- taking and higher default risk before (2002-2006) and after (2009-2010) the crisis. Conversely, it improves profitability and no longer affects risk during the crisis (2007-2008). Further evidence shows that, regardless of the period, the effect of excess control rights on profitability and risk is accentuated in family-controlled banks and in countries with relatively weak shareholder protection rights and that such an effect is only effective at intermediate and high levels of excess control rights. Overall, our findings contribute to the literature examining the corporate governance determinants of banks' performance during the 2007- 2008 financial crisis and have several policy implications.
{"title":"Excess Control Rights, Financial Crisis and Bank Profitability and Risk","authors":"Amine Tarazi, Nadia Zedek","doi":"10.2139/ssrn.2311738","DOIUrl":"https://doi.org/10.2139/ssrn.2311738","url":null,"abstract":"We empirically investigate the impact of shareholders' excess control rights (greater control than cash-flow rights) on bank profitability and risk before, during, and after the global financial crisis of 2007-2008. We use a unique hand-crafted dataset tracing the complete control chains of 788 European commercial banks and cover the 2002-2010 period. We find that the presence of excess control rights is associated with lower profitability, higher risk- taking and higher default risk before (2002-2006) and after (2009-2010) the crisis. Conversely, it improves profitability and no longer affects risk during the crisis (2007-2008). Further evidence shows that, regardless of the period, the effect of excess control rights on profitability and risk is accentuated in family-controlled banks and in countries with relatively weak shareholder protection rights and that such an effect is only effective at intermediate and high levels of excess control rights. Overall, our findings contribute to the literature examining the corporate governance determinants of banks' performance during the 2007- 2008 financial crisis and have several policy implications.","PeriodicalId":300337,"journal":{"name":"Financial Institutions 2","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2013-08-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133877612","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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