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Corporate governance and recent consolidation in the banking industry

a Santa Clara UniÍersity, 500 El Camino Real, Santa Clara, CA 95053, USA
b Kennesaw State UniÍersity, Kennesaw, GA, USA

Abstract
Using the universe of publicly traded banks at year-end 1993, we find that target banks’outside directors, but not inside directors, tend to own more stock than their counterparts inother banks. Having an outside blockholder is also associated with banks becoming targets.
In contrast to existing research on industrial firms, board structure does not help determinewhich sample banks sell. Neither the fraction of outsiders on a bank’s board nor having anoutside-dominated board differentiate the target banks in our sample. Instead, outsidedirectorsrshareholders and blockholders appear to be primarily responsible for encouragingbank managers to accept an attractive merger offer q2000 Elsevier Science B.V. All rightsreserved.

Keywords: Takeovers; Corporate governance

Financial economists have long recognized that the widespread separation ofownership and control in large US corporations creates the potential for costlyagency conflicts. Dispersed shareholders’ limited incentive to monitor the behaviorand performance of the agents hired to run their firm can give managers
substantial freedom to pursue their own interests at the expense of shareholderwealth. Absent mechanisms to control managerial behavior, usually called ‘‘corpo-
) Corresponding author.0929-1199r00r$ - see front matter q 2000 Elsevier Science B.V. All rights reserved.
PII: S0929- 119900.00011-0
142 Y. Brook et al.rJournal of Corporate Finance 6 (2000) 141–164
rate governance structures,’’ wealth maximization will not exclusively motivatecorporate decision-making.
A company’s board of directors is one of the mechanisms within the firm tomonitor and control managerial behavior.1 The board hires, fires, and compensatesa firm’s top management. However, board members are subject to their ownagency problems. A firm’s chief executive officer CEO. is generally a member
of, and is often the chairman of, the board of directors. CEOs typically also play amajor role in selecting new nominees for the board Lorsch and MacIver, 1989.. Ifboard members are strongly influenced by or beholden to the firm’s top officers, itis unclear whether the board can successfully align shareholder and managerinterests.
The banking industry’s ongoing consolidation offers an excellent experimentalsetting for examining board effectiveness. During the last decade, technologicaladvances in communication and information technologies have reduced the costs
of having a geographically dispersed banking organization. Simultaneously, lawsand regulations that had previously fragmented the banking industry have beenrelaxed or, in some cases, eliminated.2 The joint effect has been a dramatic surgein merger activity that has sharply reduced the number of US banks Holland et
al., 1996..Similar to acquisitions by industrial firms, the lion’s share of takeover gains inbank mergers goes to target shareholders see Jensen and Ruback 1983. for asummary of industrial takeover research.. For example, in a sample of 153 bankacquisitions between 1985 and 1991, Houston and Ryngaert 1994. find that targetbanks earn positive average abnormal returns of 14.4% and bidder shareholderssuffer negative average abnormal returns of y2.3%. In contrast to target sharehold本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。