oard of directors, along withthe regulatory constraints. Our paper focuses on those governance mechanisms thatare implemented by the board, such as the replacement of managers and directorswhen a bank’s economic performance does not meet the owners’ expectations. 2
Following previous work on this subject, 3 it is assumed here that internal-controlworks properly if the probability of a significant board turnover, or the dismissal of atop executive, is inversely related to the economic performance of the bank, measuredin terms of accounting rates of return. 4 We also consider a friendly mergerof banks as an intermediate control mechanism, somewhere in between the internal
mechanisms and the external ones. This is so because mergers must be approved bythe governance bodies of the bank, and also because the target bank’s assets are
1 Tirole (2001) has caused a stir in the field with his views on the role of stakeholders. For a recentsurvey of the literature on corporate governance see Becht et al. (2002).
2 Governance should be viewed as a system where each individual mechanism works interrelated withthe others. A comprehensive analysis of the governance of Spanish banks is not feasible at this point and,
although we have tried to take into account most of the available public information, the final analysis islimited to a subset of mechanisms keeping the rest as given.
3 See, for example, Kaplan (1994a) and Franks et al. (2001) for non-financial firms, and Barro andBarro (1990), Blackwell et al. (1994) and Prowse (1995) for banking firms.
4 The ‘‘quality’’ of corporate governance has been also evaluated by looking at decisions adopted by theboard other than directors’ replacement, such as the level and composition of management compensation,the size of the board and the number of outsiders in it.
2312 R. Crespı et al. / Journal of Banking &
Finance 28 (2004) 2311–2330transferred to the acquiring company. For this scenario, it is assumed herein thatgood governance will predict that the likelihood that a bank merges (and, therefore,its assets be transferred to another bank) increases with a lower economic performanceof the target bank.
An important distinctive feature of our approach is that we compare the workingsof governance mechanisms for three different forms of bank ownership: IndependentCommercial banks, Subsidiaries (or Dependent banks) and Savings banks, whichrepresent a case of a lack of ownership. This comparison is unique in the existing literaturesince the previous papers consider only one form of ownership at a time.Independent Commercial banks are privately owned banks whose shares are in
the hands of families, individual investors and institutional investors. A bank is identifiedas Dependent when it has another bank (either national or international) as acontrolling shareholder. Finally the Savings banks, ‘‘Cajas de Ahorros’’, can be consideredas ‘‘commercial non-profit organizations’’ in the sense of Hansmann (1996).The Cajas control about half of the Spanish retail banking market. They competefor loans and deposits among themselves and with Commercial banks. Unlike Commercialbanks, however, Savings banks must either retain their earnings or investthem in social and cultural programs (around 25% of their net profits go each yearto these programs). They have no formal owners and there is no market then for corporatecontrol of Savings banks. Moreover, the general assembly and the board ar
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