Board Monitoring, Regulation, and Performance in the Banking Industry: Evidence from the Market for Corporate Control

Abstract

ABSTRACT Manuscript Type: Empirical Research Question/Issue: The specific monitoring effect of boards of directors versus industry regulation is unclear. In this paper, we examine how the interaction between bank‐level monitoring and regulatory regimes influences the announcement period returns of acquiring banks in the US and twelve European economies. Research Findings/Insights: We study three board monitoring mechanisms – independence, CEO‐chair duality, and diversity – and analyze their effectiveness in preventing underperforming merger strategies under bank regulators of varying strictness. Only under strict banking regulation regimes, do board independence and diversity improve acquisition performance. In less strict regulatory environments, corporate governance is virtually irrelevant in improving the performance outcomes of merger activities. Theoretical/Academic Implications: Our results indicate a complementary role between monitoring by boards and bank regulation. This study is the first to report evidence consistent with complementarity by investigating the effectiveness (rather than the prevalence) of governance arrangements across regulatory regimes. Practitioner/Policy Implications: Our work offers insights to policymakers charged with improving the quality of decision‐making at financial institutions. Attempts to improve the ability of bank boards to critically assess managerial initiatives are most likely to be successful if internal governance is accompanied by strict industry regulation.