How to explain non-performing loans by many corporate governance variables simultaneously? A corporate governance index is built to US commercial banks |
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Institution: | 1. Department of Economics, University of Bologna, Strada Maggiore, 45, 40125 Bologna, Italy;2. Department of Economics, University of Bologna and IGIER-Bocconi, Italy;3. Department of Economics, University of Bologna, Italy |
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Abstract: | This paper aims to combine the principal component analysis and GMM dynamic panel data methods in order to estimate the effect of corporate governance system on non-performing loans. The first method is meant to construct a corporate governance index for US commercial banks. The second one allows us to study the relation between the built index and non-performing loans. The advantage of the combination of these methods is reducing the number of corporate governance variables into a single one and ensuring the consistency of GMM estimates, given that a high number of variables leads to an increase in the number of GMM instruments, which in turns results in biased estimators. Applying these methods to US commercial banks, for a period including the financial crisis years, we find that small banks are characterized by a sound corporate governance system that reduces their non-performing loans. In opposition, the corporate governance fails to protect medium and large US commercial banks from excessive risk-taking that damages their loans’ quality and even leads to enormous losses especially during the global financial crisis. |
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Keywords: | Global financial crisis Corporate governance index Non-performing loans GMM dynamic panel data estimator PCA method |
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