Non-Monotonic Relationship between Corporate Governance and Banks’ Operating Performance—The Moderating Role of CEO Duality: Evidence from Selected Countries
Abstract
:1. Introduction
2. Theoretical Framework and Hypotheses Development
3. Data and Methodology
3.1. Sample
3.2. Variables
3.3. Model for the Non-Monotonic Relationship between CG and Operating Performance
4. Two-Line Approach and the Robin Hood Algorithm
- Our study refers to the predictor hypothesized to have a U-shaped effect as CG2, and the dependent variable as NIM.
- To test if the effect of CG2 is U-shaped (or inverted U-shaped) on performance, the two-line test procedure conducted the following:
- Run a quadratic regression of the form Performance = aCG + bCG2
- The results were a = 0.022 and b = −0. With these values, one obtains the implied slope (a + 2bCG2) at the lowest observed value of CG (CGmin = 0). If that slope is negative at that point, the two-line test considers a U shape; if it is positive, an inverted-U shape. Here the quadratic implies a slope of 0.022 at the lowest CG value of CG = 0, which was positive; thus, it tested for an inverted-U shape.
- Estimated a spline (smoothed scatterplot) model, Performance = f (CG). See the gray dashed line in Figure 1a–c.
- Among the middle 80% of CG values (between the 10th and 90th percentile), the most extreme fitted Performance value was identified: performancemax = 73.369, which corresponds to CG2 = 6346.164.
- All CG values associated with a fitted performance within a standard error of performance max were identified: CGflat.
- The median CG value in CGflat was identified as 6411.041.
- An interrupted regression was estimated with that midpoint value as the breakpoint (with heteroskedasticity-robust standard errors (using ‘HC3’ by default, switching to ‘HC1’ if a NA is produced)).
- The resulting z-values (b/se) for the two slopes were z1 = 51.77 and z2 = 42.544.
- Using these z-values, we computed the following ratio, z1/(z1 + z2) = 0.549, which is the percentile of the CG2 value within CGflat used as the breakpoint for the final interrupted regression, whose results are depicted in Figure 1, CGc = 6363.672.
5. Results
6. The Interaction Effect of CEO Duality
7. Discussion and Conclusions
Author Contributions
Funding
Institutional Review Board Statement
Informed Consent Statement
Data Availability Statement
Conflicts of Interest
References
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Author(s) | Dependent Variables | Governance (Control) and Dummy Variables | Data | Methods | Results |
---|---|---|---|---|---|
Onal and Asthon [51] | ROA, ROE, and NIM | Board size, Board independence, Board Structure, Gender diversity, Nationality diversity, CEO Duality, and Foreign Ownership | The data comprise 211 banks from an estimated total of 2241 banks, including major banks, functioning in EU member and candidate states from 2000 to 2015. | Fixed Effect Model | Significant Negative Impact |
Khan and Wang [52] | ROA | Bank size and financial leverage | The data consist of 17 commercial banks (CBs) in China from 2008 to 2019. | GMM | Significant and Positive |
Boachie [53] | ROA | Audit committee size, Non-executive director, CEO duality, Board size, and Board ownership | The data include 23 Ghanaian banks that were active between 2006 and 2018. | Multiple regression method | Significant and Positive |
Khan and Zahid [54] | ROA, ROE, and Tobin’s Q | CGI, Board Size, Board education, Board independence, Board activity and ownership structure | The data include 79 Islamic banks from 19 countries, totaling 553 entities with year-to-year observations from 2010 to 2016. | Panel random effects regression | Significant and Positive |
Ajili and Bouri [55] | ROA, ROE, and Tobin’s Q | Board of directors, Audit committee and Shariah Supervisory Board indices | A sample consists 44 IBs operating in the GCC from 2010 to 2014. | Multiple regression models | Insignificant |
Gangi et al. [56] | ENV Score and Z-Score | Board size, Board independence, Board diversity, CEO power and CEO compensation | The data include a sample of 142 banks from 35 countries from 2011 to 2015. | Heckman’s two-stage model | Significant and Positive |
Bachiller and Garcia-Lacalle [57] | ROA | Total assets, no. of employees, and no. of branches | The data contain 45 SBs that were operating in Spain in 2009. | Structural Equation Model (SEM)- PLS | Insignificant |
Tarchouna et al. [58] | Non-performing Loans | Board size, Board independence, CEO duality, and ownership structure | The sample comprise 184 US commercial banks from the years 2000 to 2013. | PCA and GMM dynamic panel data methods | Small banks are characterized by a sound CG system as opposed to medium and large banks |
Variable | US | INDIA | JAPAN | AUSTRALIA | ALL |
---|---|---|---|---|---|
OBS. | 2790/279 | 250/25 | 740/74 | 450/45 | 4230 |
NIM | 72.512 | 54.837 | 7.369 | 28.837 | 55.425 |
ROA | 58.882 | 41.786 | 10.944 | 44.252 | 47.929 |
ER | 54.434 | 32.631 | 72.786 | 18.868 | 52.572 |
CG | 75.973 | 38.193 | 21.635 | 94.087 | 66.161 |
CEO_Duality | 32.294 | 24 | 59.054 | 0 | 33.050 |
TBQ | 46.158 | 37.226 | 9.822 | 55.312 | 40.247 |
LEV | 17.592 | 32.253 | 25.131 | 85.651 | 27.017 |
Earnings | 0.415 | 28.724 | 44.407 | 6.895 | 10.474 |
GDP | 49.792 | 55.9 | 55.006 | 55.214 | 51.642 |
Inflation Rate | 1.885 | 5.877 | 0.54 | 1.867 | 1.884 |
Variable | Observations | Mean | Median | Maximum | Minimum | Std. Dev. |
---|---|---|---|---|---|---|
NIM | 4230 | 55.425 | 63.966 | 100.000 | 0.000 | 30.020 |
ROA | 4230 | 47.929 | 51.761 | 100.000 | 0.000 | 28.808 |
ER | 4230 | 52.572 | 53.066 | 100.000 | 0.000 | 26.239 |
CG | 4230 | 66.161 | 76.661 | 100.000 | 0.000 | 28.418 |
CEO_DUALITY | 4230 | 33.050 | 0.000 | 100.000 | 0.000 | 47.045 |
TBQ | 4230 | 40.247 | 37.151 | 100.000 | 0.000 | 28.304 |
LEV | 4230 | 27.017 | 17.544 | 100.000 | 0.000 | 27.451 |
EARNINGS | 4230 | 10.474 | 0.113 | 100.000 | 0.000 | 23.760 |
GDP | 4230 | 51.642 | 55.275 | 100.000 | 0.000 | 32.187 |
INFLATION RATE | 4230 | 1.884 | 1.622 | 10.018 | −0.233 | 1.590 |
Variables | NIM | ROA | TBQ | CEO_ DUALITY | CG | ER | GDP | INFLATION_RATE | EARNINGS | LEV |
---|---|---|---|---|---|---|---|---|---|---|
NIM | 1 | |||||||||
----- | ||||||||||
ROA | 0.361648 | 1 | ||||||||
0 | ----- | |||||||||
TBQ | 0.405129 | 0.21931 | 1 | |||||||
0 | 0 | ----- | ||||||||
CEO_ DUALITY | −0.1383 | −0.10169 | −0.11084 | 1 | ||||||
0 | 0 | 0 | ----- | |||||||
CG | 0.488476 | 0.303733 | 0.27445 | −0.24567 | 1 | |||||
0 | 0 | 0 | 0 | ----- | ||||||
ER | −0.1104 | −0.30266 | −0.25837 | 0.142959 | −0.32763 | 1 | ||||
0 | 0 | 0 | 0 | 0 | ----- | |||||
GDP | −0.13587 | 0.05574 | −0.01357 | −0.04946 | 0.093529 | −0.10619 | 1 | |||
0 | 0.0003 | 0.0075 | 0.0013 | 0 | 0 | ----- | ||||
INFLATION_ RATE | 0.207586 | 0.276484 | 0.144352 | −0.09624 | 0.072858 | −0.28504 | 0.173376 | 1 | ||
0 | 0 | 0 | 0 | 0 | 0 | 0 | ----- | |||
EARNINGS | −0.2353 | −0.18439 | −0.29771 | 0.095477 | −0.15565 | 0.029692 | 0.09473 | −0.11571 | 1 | |
0 | 0 | 0 | 0 | 0 | 0.0535 | 0 | 0 | ----- | ||
LEV | −0.39236 | −0.14756 | 0.107295 | −0.17817 | 0.200804 | −0.382 | −0.02664 | −0.0447 | 0.162474 | 1 |
0 | 0 | 0 | 0 | 0 | 0 | 0.0332 | 0.0401 | 0 | ----- |
Dependent Variable | |||
---|---|---|---|
NIM | ROA | ER | |
(1) | (2) | (3) | |
CG | 1.233 *** | 0.417 *** | 0.466 *** |
(0.047) | (0.040) | (0.047) | |
TBQ | 0.130 *** | 0.507 *** | −0.334 *** |
(0.010) | (0.012) | (0.012) | |
LEV | −0.490 *** | −0.214 *** | −0.237 *** |
(0.011) | (0.011) | (0.012) | |
Earnings | −0.290 *** | −0.066 *** | −0.121 *** |
(0.015) | (0.011) | (0.016) | |
GDP | −0.142 *** | −0.003 | −0.019 * |
(0.009) | (0.009) | (0.010) | |
Inflation_Rate | 2.546 *** | 3.272 *** | −3.425 *** |
(0.220) | (0.206) | (0.237) | |
I((CG2)) | −0.008 *** | −0.002 *** | −0.006 *** |
(0.0004) | (0.0004) | (0.0005) | |
Constant | 27.266 *** | 10.845 *** | 82.184 *** |
(1.385) | (1.075) | (1.278) | |
Observations | 4230 | 4230 | 4230 |
R2 | 0.658 | 0.597 | 0.476 |
F Statistic (df = 7; 4222) 1160.100 *** 893.557 *** 547.413 *** |
Dependent Variable | |||
---|---|---|---|
NIM | ROA | ER | |
(1) | (2) | (3) | |
CG | 0.956 *** | 0.415 *** | 0.485 *** |
(0.044) | (0.040) | (0.047) | |
TBQ | 0.184 *** | 0.505 *** | −0.333 *** |
(0.011) | (0.012) | (0.012) | |
LEV | −0.465 *** | −0.216 *** | −0.234 *** |
(0.012) | (0.011) | (0.012) | |
Earnings | −0.256 *** | −0.066 *** | −0.122 *** |
(0.014) | (0.011) | (0.015) | |
GDP | −0.158 *** | −0.003 | −0.020 * |
(0.009) | (0.009) | (0.010) | |
Inflation_Rate | 2.957 *** | 3.257 *** | −3.354 *** |
(0.181) | (0.208) | (0.238) | |
I((CG2)) | −0.006 *** | −0.002 *** | −0.006 *** |
(0.0004) | (0.0004) | (0.0005) | |
CEO_Duality | −0.050 *** | −0.004 | 0.017 ** |
(0.006) | (0.006) | (0.007) | |
Constant | 33.220 *** | 11.164 *** | 80.770 *** |
(1.267) | (1.169) | (1.350) | |
Observations | 4230 | 4230 | 4230 |
R2 | 0.639 | 0.594 | 0.482 |
F Statistic (df = 8; 4221) 934.856 *** 771.953 *** 490.385 *** |
Dependent Variable | |||
---|---|---|---|
NIM | ROA | ER | |
(1) | (2) | (3) | |
CG | 1.325 *** | 0.476 *** | 0.815 *** |
(0.072) | (0.057) | (0.065) | |
TBQ | 0.131 *** | 0.506 *** | −0.327 *** |
(0.010) | (0.012) | (0.012) | |
LEV | −0.483 *** | −0.197 *** | −0.214 *** |
(0.011) | (0.011) | (0.013) | |
Earnings | −0.265 *** | −0.056 *** | −0.100 *** |
(0.015) | (0.011) | (0.015) | |
GDP | −0.137 *** | 0.001 | −0.007 |
(0.009) | (0.009) | (0.010) | |
Inflation_Rate | 2.261 *** | 3.195 *** | −3.471 *** |
(0.215) | (0.214) | (0.229) | |
I((CG2)) | −0.009 *** | −0.003 *** | −0.009 *** |
(0.001) | (0.001) | (0.001) | |
CEO_Duality | −0.043 * | −0.013 | 0.142 *** |
(0.025) | (0.017) | (0.020) | |
I((CG2) * CEO_Duality) | 0.0001 *** | 0.00004 *** | 0.0001 *** |
(0.00001) | (0.00001) | (0.00001) | |
CG:CEO_Duality | −0.004 *** | −0.003 *** | −0.008 *** |
(0.001) | (0.001) | (0.001) | |
Constant | 30.031 *** | 10.865 *** | 72.256 *** |
(2.342) | (1.608) | (1.892) | |
Observations | 4230 | 4230 | 4230 |
R2 | 0.681 | 0.608 | 0.503 |
F Statistic (df = 10; 4219) 899.145 *** 653.295 *** 426.860 *** |
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Enam, M.; Shajar, S.N.; Das, N. Non-Monotonic Relationship between Corporate Governance and Banks’ Operating Performance—The Moderating Role of CEO Duality: Evidence from Selected Countries. Sustainability 2023, 15, 5643. https://doi.org/10.3390/su15075643
Enam M, Shajar SN, Das N. Non-Monotonic Relationship between Corporate Governance and Banks’ Operating Performance—The Moderating Role of CEO Duality: Evidence from Selected Countries. Sustainability. 2023; 15(7):5643. https://doi.org/10.3390/su15075643
Chicago/Turabian StyleEnam, Marghoob, Syed Noorul Shajar, and Niladri Das. 2023. "Non-Monotonic Relationship between Corporate Governance and Banks’ Operating Performance—The Moderating Role of CEO Duality: Evidence from Selected Countries" Sustainability 15, no. 7: 5643. https://doi.org/10.3390/su15075643