Are differences in banking capital structure traceable to differences in quality of corporate governance in banks?
Abstract
This study examines relationship between corporate governance and capital structure decision in the banking sector in American by selecting, testing and analyzing the corporate governance and capital structure theories of eight selecting banks listed in the New York Stock Securities Exchange over the period of 2010- 2013. Specifically over a period of ten years. Corporate governance has the responsibility off protecting the shareholder from risk. Additionally, owing to differences in corporate governance mechanisms, some banks may have weaker corporate governance mechanisms which may lead to such banks running in to different managerial problems thus leading to different outcomes in their capital structure. Therefore, corporate governance to infuse proper management practices, control and stringent monitoring and effective utilization of resources to improve performance if good corporate governance practices are maintained.
Are differences in Banking Capital Structure traceable to differences in Quality of Corporate Governance in Banks?
Introduction
Over the decades the banking corporate governance and capital structure has attracted public interest due to the fact it acts as tool of socio-economic development. Specifically, when there is an effective and proper corporate governance and capital structure it will ensure that business entities perform effectively. Consequently, reducing the number of corporate failures, indiscipline of both management and employees, poor internal control and poor capital structure. A studies show that corporate governance was rudimentary stage in the American banking sector few companies understand the place of corporate governance principles or ignore them in totality. Poor corporate was the major cause of the financial melt-down in 2007 causing financial distress in the world. Financial scandals by banks and other corporate institutions caused the collapse of Lehman Brothers and AIG. Therefore, this has brought the need to promote a culture of good corporate governance and capital structure.
Literature Review
According to studies done by (Berger et al, 1997; Friend and Lang, 1988; Abor, 2007) have shown that there is a correlation between corporate governance and capital structure. Moreover, a stronger correlation obtained with larger firms. Present literature characterize corporate governance to be the number of board members, composition, tenure and compensation. However, studies empirical results are varied of the relationship that exists between corporate governance and capital structure and inconclusive. According to Lipton and Llorsch (1992) showed that there was a relationship between the board size and capital structure. Another study Berger et al (1997) showed the firms that larger board size have lower debt ratio.
Methodology
This section presents the methods used to gather information for the study, outlining the nature and source of data as well as the techniques employed in analysis and its potential limitation.
Research hypothesis
Hypothesis 1. Board size is highly linked with debt to equity ratio in banks
Hypothesis 2. Ownership concentration negatively associated with debt to equity ratio.
Hypothesis 3. The ownership structure and CEO duality significantly determine Debt to Equity ration
Hypothesis 4. The degree of ownership structure is negatively correlated with bank performance.
Hypothesis 5. CEO duality is positively correlated with firm size and debt to equity ratio in banks.
Data description and Methodology
The proposed research will use an explanatory quantitative research model of data in testing the correlation between the differences in banking capital structure and the differences in quality of corporate governance in banks. The study will examine the effect of three sets of variables on capital structure: the first set of variables would include corporate governance variables of Composition of Board, Size of Board, and CEO Duality; the second set would consist ownership variables of relationship between management and ownership of the bank, representing Managerial Shareholding, Private Investors’ shareholding and Institutional Shareholding. The third set will comprise of control variables i.e. Size of Bank and Profitability as ROA. All these three sets of variables will be treated as independent variable while Debt to Equity Ratio representing capital structure will be the dependent variable.
Conclusion
The proposed study will employ level data 10 banks listed on the New York Stock Exchange using multivariate regression analysis following fixed effect model technique. The study examines corporate governance variables of board’s size, board composition, and CEO duality. It also aims to measure the effect of shareholding on the financing decision by examining three ownership segments: managerial shareholding, private investors’ shareholding, and institutional shareholding. There will also be examination of the role of such controlled variables as bank size and profitability (as ROA).
