Principal-Agent Relationships in Multinational Banks - Evidence from Executive Appointments

Abstract

Explanations for differences in the performance and behavior of domestic and foreign-owned banks are grounded in assumptions about the ability of parent banks to provide subsidiaries with capital and knowledge and the ability to manage asymmetric information and agency problems in the parent-subsidiary relationship. In this paper, we present a unique new dataset to investigate how foreign owners use the power to appoint executives at their subsidiaries to manage these agency problems. We find that parent banks are more likely to choose host-country CEOs when monitoring institutions (supervision and accounting rules) in the host country are strong. Moreover, the effect of monitoring institutions on CEO type is stronger when there is strict supervision in the parent country and when cultural distance between home and host countries is large. These results are in line with a set of hypothesis that are based on the assumptions that the appointment of CEOs involves a trade-off between insight into the local business environment and congruence of objectives and that, on the margin, host-country CEOs have better insight, while the objectives of parent-bank CEOs are better aligned with those of the parent. However, we find no evidence that an improvement in creditor rights or credit information, which reduce information asymmetries within subsidiaries, have an impact on CEO appointments.