Abstract
The existing literature provides conflicting views of the relationship among board characteristics; performance(Return on Assets and Return on Equity) and bank risk taking (Z-score). The relation between characteristics ofcorporate boards, firm performance and risk taking continues to be a fundamental issue in the corporategovernance literature. Findings of this literature are often inconclusive. The main contribution of this study is ananalysis of how board characteristics affect performance and incentives to take risk in banking industry. Weexplore this relationship by using both generalized least square (GLS) random effect (RE) and generalizedmethod of moments (GMM) system approaches. The empirical analysis based on a sample of 11 large Tunisiancommercial banks during 1997-2006, reports the following robust results: a small bank board is associated withmore performance and with more bank risk-taking, the presence of independent directors within the board ofdirectors affects negatively the performance, but has no significant effect on the risk-taking, a lower CEOownership is associated with lower performance in Tunisian banks, banks with high charter value are associatedwith lower ROA and ROE and more bank risk and the small size banks institutions appear to assume lower risks.Our results support the idea, commonly accepted, that bank board structure is a determinant factor for bankperformance and bank risk taking.
Highlights
After the collapse of Enron in 2001, the literature of banking governance has exploded
The empirical analysis based on a sample of 11 large Tunisian commercial banks during 1997-2006, reports the following robust results: a small bank board is associated with more performance and with more bank risk-taking, the presence of independent directors within the board of directors affects negatively the performance, but has no significant effect on the risk-taking, a lower CEO ownership is associated with lower performance in Tunisian banks, banks with high charter value are associated with lower returns on assets (ROA) and ROE and more bank risk and the small size banks institutions appear to assume lower risks
With regards to board characteristics, the coefficient on Board size (BS) is negative (-0.001 and -0.008) across all two measures of performance and respectively statistically significant at the level of 10% for ROA and 1% for ROE. This result suggests that, a small bank board is associated with more performance and that the addition of new directors in Tunisian banks’ board affects negatively the performance of bank firms
Summary
After the collapse of Enron in 2001, the literature of banking governance has exploded. Pathan et al (2008) confirm that much of empirical models results corporate governance, performance and risk behaviour in corporate firms are applicable to banks. Banking governance can be either through internal mechanism (board of directors) or external mechanism (banking regulation and supervision, ownership structure...). Pathan and Skully (2010) show that the bank board of directors is even more important as a governance mechanism than its non-banks firm. This study tries to explore the nature of relation between bank board, as an internal mechanism of banking governance, bank performance and bank risk-taking in Tunisian context. The remainder of the paper is organized as follows: Section 2 presents a brief review of earlier literature on board governance by discussion the role of the board on performance and bank risk-taking behaviour.
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