Board structure, ownership, and financial distress in banking firms

Abstract

This investigation pursues a new direction in the analysis of financial distress in banking firms. The research was inspired by recent research on corporate governance and the need to understand the internal processes behind the financial decisions that result in bank failures. The analysis examined the relationship between the ownership and structure of the board of directors and the internal control mechanism that influences the survival of the firm. The following aspects of ownership and governance are investigated: ownership by directors and officers, ownership by the CEO, number of directors, percentage of inside directors, and CEO duality. The influence of board structure and ownership on the probability of financial distress was explored with a sample of approximately 300 banking firms. The empirical tests indicated a lower probability of financial distress when one person is both the CEO and chairman of the board, but the other factors did not have a significant effect.