Do bank independency and diversification affect bank failures in Europe?
Review of Accounting and Finance
ISSN: 1475-7702
Article publication date: 31 July 2019
Issue publication date: 9 August 2019
Abstract
Purpose
Motivated by agency theory, this paper aims to explore the impact of bank diversification and bank independency on the likelihood of bank failure. The effects of corporate governance (ownership and board structures) are also examined.
Design/methodology/approach
Logistic regressions are used to explore the role of corporate governance on bank failure risk. This sample covers 608 banks from eight European countries.
Findings
The results suggest that the well-documented finding that diversification and bank independency may increase bank failure risk does not persist under strong corporate governance mechanism. Thus, to reduce the bank failure risk, diversification should be strongly monitored by the management to avoid excessive risk-taking by shareholders.
Originality/value
The approach used in this study differs from that used in previous studies from certain perspectives. First, unlike most previous studies that focused on the relationship between bank performance and bank diversification, the impact of income and asset diversification on bank failure is tested. Also, the impact of a combined effect of diversification and corporate governance variables on bank failure is tested. This allows the control for different ownership and board variables as factors that would potentially affect the likelihood of bank failure.
Keywords
Citation
Mili, M., Khayati, A. and Khouaja, A. (2019), "Do bank independency and diversification affect bank failures in Europe?", Review of Accounting and Finance, Vol. 18 No. 3, pp. 366-398. https://doi.org/10.1108/RAF-09-2017-0181
Publisher
:Emerald Publishing Limited
Copyright © 2019, Emerald Publishing Limited