Abstract
This study examines the effect of the legal system on the governance of banks and hence on financial distress. We compare corporate governance to the legal system in 18 countries of the European Union to explain the relationship between financial distress and bank governance. Using a sample of 147 commercial banks, we find that the effect of the legal system really counts. The results also suggest that banks operating in common law and civil law countries tend the concentration of ownership and board size to the effect of increasing the likelihood of financial distress. This study contributes to research in the governance of enterprise to provide empirical evidence that the legal system has the power to influence the financial health of banks.
Highlights
Literature reviewThe advent of the law and finance literature underlined the prominence of country-level governance institutions the incidence of principal-principal conflicts, e.g. (Young et al 2008)
The results suggest that banks operating in common law and civil law countries tend the concentration of ownership and board size to the effect of increasing the likelihood of financial distress
Our results indicate that corporate governance at the enterprise level varies with different combinations of financial structure and legal systems, which in turn exerts a different influence on the performance of the enterprise market in the host country
Summary
The advent of the law and finance literature underlined the prominence of country-level governance institutions the incidence of principal-principal conflicts, e.g. (Young et al 2008). Investigation on the relation between law and finance encased by the framework of corporate governance (Durnev& Kim 2005, La Porta et al 2002) funds the notion that the diversity in the nature and potency of financial systems about the world can be marked in part to the differences in investor protections versus expropriation by insiders, as revealed by judicial rules and the quality of their application (La Porta et al 1997). A country's financial organization should be reinforced by a supportive legal structure that defends creditors' rights, that is supported by a common belief in the inviolability of contracts, and that enables their efficient execution Such a context incorporating both suitable important rules and efficient application mechanisms is more conceivable to foster a sturdy banking system and enable effective bank supervision. In Anglo-Saxon countries, institutional investors can help reduce the problem of discretionary management
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