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Default Risk Estimation, Bank Credit Risk, and Corporate Governance
Author(s) -
Switzer Lorne N.,
Wang Jun
Publication year - 2013
Publication title -
financial markets, institutions and instruments
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.386
H-Index - 23
eISSN - 1468-0416
pISSN - 0963-8008
DOI - 10.1111/fmii.12005
Subject(s) - corporate governance , business , credit risk , sample (material) , creditor , accounting , financial system , actuarial science , finance , debt , chemistry , chromatography
This study explores the relationship between credit risks of banks and the corporate governance structures of these banks from the perspective of creditors. The cumulative default probabilities are estimated for a sample of US commercial and savings banks to measure their risk taking behavior. The results show that one year and five year cumulative default probabilities are time‐varying, with a significant jump observed in the year prior to the financial crisis of 2008–09. Generally speaking, corporate governance structures have a greater impact on US commercial banks than on savings institutions. We provide evidence that, after controlling for firm specific characteristics, commercial banks with larger boards and older CFOs are associated with significantly lower credit risk levels. Lower ownership by institutional investors and more independent boards also have lower credit risk levels, although these effects are somewhat less significant. For all the banks in our sample, large board size, older CFO, and less busy directors are associated with lower credit risk levels. When we restrict the sample to consider the joint effects of the governance variables, the results on board size and busy directors are maintained.