Does corporate governance mitigate bank diversification discount?

Abstract

This study investigates the relations between corporate governance structures, level of diversification, and excess value of the U.S. banks for 2003–2008. Our analysis produces several major findings. First, diversified banks are different from specialized banks in their board structure, monitoring function of audit committee, and the level of antitakeover provisions. Second, governance mechanisms are associated with bank diversification: as the level of diversification increases, board independence, institutional ownership, and managerial entrenchment decrease whereas the ratio of certified inside board directors significantly increases. Our results show that governance structure—particularly the leadership structure, the ratio of certified inside directors on the board, and the level of managerial entrenchment—plays an important role in determining the excess value of diversified banks. The findings provide some insights for bank policymakers, including the proper design or regulation of bank governance structures, which is critical to bank performance because regulation is no longer a substitute for bank governance.