Toward a Better Measure of Bank Corporate Governance

Advances in Financial Economics, Volume 18, 2015

61 Pages Posted: 30 Sep 2016

See all articles by James E. McNulty

James E. McNulty

Florida Atlantic University

Aigbe Akhigbe

University of Akron - Department of Finance

Date Written: April 30, 2015

Abstract

Directors help determine the strategic direction of a corporation and are responsible for ensuring the institution has a good system of internal control. Banking institutions without a strategic direction emphasizing sound lending practices that promote the long-run financial health and viability of the institution will be sued more frequently than peer institutions. Institutions that do not have a good system of internal control will also be sued more frequently. Hence, legal expense is a bank corporate governance measure. We compare the performance of bank legal expense and a widely cited corporate governance index in a regression framework to determine which better predicts bank performance. The regressions indicate legal expense is a much better predictor, hence a better measure of bank corporate governance. Regulators should require legal expense reporting and rank institutions by the ratio of legal expense to assets to help identify institutions with weak governance. Seven case studies illustrate the role of legal expense in corporate governance.

Suggested Citation

McNulty, James E. and Akhigbe, Aigbe, Toward a Better Measure of Bank Corporate Governance (April 30, 2015). Advances in Financial Economics, Volume 18, 2015, Available at SSRN: https://ssrn.com/abstract=2843639 or http://dx.doi.org/10.2139/ssrn.2843639

James E. McNulty (Contact Author)

Florida Atlantic University ( email )

777 Glades Rd.
Boca Raton, FL 33341
United States
(561) 297-2708 (Phone)

Aigbe Akhigbe

University of Akron - Department of Finance ( email )

Akron, OH 44325-4803
United States
330-972-6883 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
94
Abstract Views
683
Rank
499,092
PlumX Metrics