Corporate Governance in European Banks: Essays on Bank Ownership

Banks are important as they have a central role in the financial system, where funds are channelled either through financial intermediaries, such as banks, or through financial markets, hence promoting growth in any economy. Recently, we have been reminded of the drawbacks of the central role of banks. The current financial crisis, which started out as a sub-prime mortgage crisis in the US, has become a global financial crisis with substantial impact on the real economy in many countries. Some of the roots to the current financial crisis can be sought in the changing role of banks and in bank corporate governance. Moreover, the substantial revitalising measures taken have been justified by the central role of banks. Not only are banks important, they are also very special. The fact that banks are regulated in conjunction with greater opacity, make bank corporate governance different from corporate governance in non-bank companies. Surprisingly little is, however, known about bank corporate governance, in particularly, in a European setting. Hence, the objective of this doctoral thesis is to provide new insights in this research area by examining banks from 37 different European countries. Each of the three essays included in the doctoral thesis examines a particular aspect of bank corporate governance. In the first essay the interaction between the regulatory environment a bank operates in and its ownership structure is explored. Indicators of the severity of the moral hazard problem induced by the deposit insurance system and implicit too-big-to-fail government guarantee, particular features of deposit insurance systems as well as legal protection of shareholders, legal origin of a country and level of integration to the European community are used in the analysis. The empirical findings confirm previous findings on the link between legal protection of shareholders and ownership structure. Moreover, they show that differences in deposit insurance system features can explain some of the differences in ownership structure across European banks. In the second essay the impact of management and board ownership on the profitability of banks with different strategy is examined. The empirical findings suggest that the efficiency of these two particular corporate governance mechanisms varies with the characteristics of the agency problem faced by the bank. More specifically, management ownership is important in opaque non-traditional banks, whereas board ownership is important in traditional banks, where deposit insurance reduces the monitoring incentives of outsiders. The higher profitability does, however, go together with higher risk. In the third essay the profitability and risk of commercial, savings and cooperative banks are compared. The empirical findings suggest that distinct operational and ownership characteristics rather than only the mere fact that a bank is a commercial, savings or cooperative bank explain the profitability and risk differences. The main insight from the three essays is that a number of different aspects should be addressed simultaneously in order to give the complexity of bank corporate governance justice.

Essays on Corporate Governance and the Quality of Disclosed Earnings: Across Transitional Europe

A growing body of empirical research examines the structure and effectiveness of corporate governance systems around the world. An important insight from this literature is that corporate governance mechanisms address the excessive use of managerial discretionary powers to get private benefits by expropriating the value of shareholders. One possible way of expropriation is to reduce the quality of disclosed earnings by manipulating the financial statements. This lower quality of earnings should then be reflected by the stock price of firm according to value relevance theorem. Hence, instead of testing the direct effect of corporate governance on the firm’s market value, it is important to understand the causes of the lower quality of accounting earnings. This thesis contributes to the literature by increasing knowledge about the extent of the earnings management – measured as the extent of discretionary accruals in total disclosed earnings - and its determinants across the Transitional European countries. The thesis comprises of three essays of empirical analysis of which first two utilize the data of Russian listed firms whereas the third essay uses data from 10 European economies. More specifically, the first essay adds to existing research connecting earnings management to corporate governance. It testifies the impact of the Russian corporate governance reforms of 2002 on the quality of disclosed earnings in all publicly listed firms. This essay provides empirical evidence of the fact that the desired impact of reforms is not fully substantiated in Russia without proper enforcement. Instead, firm-level factors such as long-term capital investments and compliance with International financial reporting standards (IFRS) determine the quality of the earnings. The result presented in the essay support the notion proposed by Leuz et al. (2003) that the reforms aimed to bring transparency do not correspond to desired results in economies where investor protection is lower and legal enforcement is weak. The second essay focuses on the relationship between the internal-control mechanism such as the types and levels of ownership and the quality of disclosed earnings in Russia. The empirical analysis shows that the controlling shareholders in Russia use their powers to manipulate the reported performance in order to get private benefits of control. Comparatively, firms owned by the State have significantly better quality of disclosed earnings than other controllers such as oligarchs and foreign corporations. Interestingly, market performance of firms controlled by either State or oligarchs is better than widely held firms. The third essay provides useful evidence on the fact that both ownership structures and economic characteristics are important factors in determining the quality of disclosed earnings in three groups of countries in Europe. Evidence suggests that ownership structure is a more important determinant in developed and transparent countries, while economic determinants are important determinants in developing and transitional countries.

Corporate Funding on the European Debt Capital Market

The integrated European debt capital market has undoubtedly broadened the possibilities for companies to access funding from the public and challenged investors to cope with an ever increasing complexity of its market participants. Well into the Euro-era, it is clear that the unified market has created potential for all involved parties, where investment opportunities are able to meet a supply of funds from a broad geographical area now summoned under a single currency. Europe’s traditionally heavy dependency on bank lending as a source of debt capital has thus been easing as corporate residents are able to tap into a deep and liquid capital market to satisfy their funding needs. As national barriers eroded with the inauguration of the Euro and interest rates for the EMU-members converged towards over-all lower yields, a new source of debt capital emerged to the vast majority of corporate residents under the new currency and gave an alternative to the traditionally more maturity-restricted bank debt. With increased sophistication came also an improved knowledge and understanding of the market and its participants. Further, investors became more willing to bear credit risk, which opened the market for firms of ever lower creditworthiness. In the process, the market as a whole saw a change in the profile of issuers, as non-financial firms increasingly sought their funding directly from the bond market. This thesis consists of three separate empirical studies on how corporates fund themselves on the European debt capital markets. The analysis focuses on a firm’s access to and behaviour on the capital market, subsequent the decision to raise capital through the issuance of arm’s length debt on the bond market. The specific areas considered are contributing to our knowledge in the fields of corporate finance and financial markets by considering explicitly firms’ primary market activities within the new market area. The first essay explores how reputation of an issuer affects its debt issuance. Essay two examines the choice of interest rate exposure on newly issued debt and the third and final essay explores pricing anomalies on corporate debt issues.

Value Creation in Professional Service Processes. Propositions for Understanding Financial Value from a Customer Perspective

Many service management studies have suggested that service providers benefit from having long-term relationships with customers, but the argument from a customer perspective has been vague. However, especially in the business-to-business context, an analysis of financial value creation seems appropriate also from a customer perspective. Hence, the aim of this study is to develop a framework for understanding monetary value creation in professional service assignments from a customer perspective. The contribution of this study is an improved insight and framework for understanding financial value creation from a customer perspective in a professional service delivery process. The sources for monetary differences between transactional and long-term service providers are identified and quantified in case settings. This study contributes to the existing literature in service and relationship management by extending the customer’s viewpoint from perceived value to measurable monetary value. The contribution to the professional services lies in the process focus as opposed to the outcome focus, which is often accentuated in the existing professional services literature. The findings from the qualitative data suggest that a customer company may benefit from having an improved understanding of the service delivery (service assignment) process and the factors affecting the monetary value creation during the process. It is suggested that long-term relationships with service providers create financial value in the case settings in the short term. The findings also indicate that by using the improved understanding, a customer company can make more informed decisions when selecting a service provider for a specific assignment. Mirel Leino is associated with CERS, the Center for Relationship Marketing and Service Management at the Swedish School of Economics and Business Administration

Owners' Way or the Highway: Short-term Expectations and Owner Impatience

Increased media exposure to layoffs and corporate quarterly financial reporting have created arguable a common perception – especially favored by the media itself – that the companies have been forced to improve their financial performance from quarter to quarter. Academically the relevant question is whether the companies themselves feel that they are exposed to short-term pressure to perform even if it means that they have to compromise company’s long-term future. This paper studies this issue using results from a survey conducted among the 500 largest companies in Finland. The results show that companies in general feel moderate short-term pressure, with reasonable dispersion across firms. There seems to be a link between the degree of pressure felt, and the firm’s ownership structure, i.e. we find support for the existence of short-term versus long-term owners. We also find significant ownership related differences, in line with expectations, in how such short-term pressure is reflected in actual decision variables such as the investment criteria used.