Corporate Governance and M&A in the Banking Industry/LE GOUVERNEMENT DE CORPORATION ET LE M&A DANS L'INDUSTRIE DE LA BANQUE (2007)

Abstract: Financial economists have long recognized that the widespread separation of ownership and control in large corporations creates the potential for costly agency conflicts. This paper exploits the banking industry's recent M&As to explore what governance characteristics are associated with managers acting in shareholders' best interests. Using the sample of publicly traded banks at year-end 2000 in different countries and a variety of empirical methods, in contrast to existing research on industrial firms, we examine the relation between governance, particularly board ownership, and M&A in the banking industry between 2001 and 2003. We find that board structure does not help determine which sample banks sell. Neither the fraction of outsiders on a bank's board nor having an outside-dominated board differentiates the target banks in our sample. Instead, outside directors/shareholders and blockholders appear to be primarily responsible for encouraging bank managers to accept an attractive merger offer. We also find a greater frequency of outside blockholders in the banks that become targets, suggesting that large non-director shareholders can also encourage banks to act in shareholders' best interests. Key Words: Corporate governance, M&A Resume : Les economistes financiers ont longtemps identifie que la separation repandue de la propriete et de la commande a de grandes societes cree le potentiel pour des conflits couteux d'agence. Cet article exploite le M&A recent du secteur bancaire pour explorer quelles caracteristiques de gouvernement de corporation sont associees aux directeurs pour realiser les meilleurs interets des actionnaires. En utilisant l'echantillon de banques publiquement commercees a la fin d'annee 2000 dans les pays differents et une variete de methodes empiriques, contrairement a la recherche existante sur les societes industrielles, nous examinons la relation entre le gouvernement de corporation, en particulier la propriete de conseil, et le M&A dans le secteur bancaire entre 2001 et 2003. Nous constatons que la structure de conseil n'aide pas a determiner en quelle mode les banques se vendent. Ni la fraction des etrangers sur le conseil d'une banque ni avoir un conseil exterieur-domine ne differencient les banques de cible dans notre echantillon. Au lieu de cela, les directeurs/actionnaires et les blockholders exterieurs semblent etre principalement responsables d'encourager des directeurs d'agence de banque a accepter une offre attrayante de fusion. Nous trouvons egalement une plus grande frequence des blockholders exterieurs aux banques qui deviennent des cibles, proposant que les grands actionnaires de non-directeur puissent egalement encourager des banques a realiser les meilleurs interets des actionnaires. Mots-cles : Gouvernement de corporation, M&A 1. INTRODUCTION Financial economists have long recognized that the widespread separation of ownership and control in large corporations creates the potential for costly agency conflicts. Dispersed shareholders' limited incentive to monitor the behavior and performance of the agents hired to run their firm can give managers substantial freedom to pursue their own interests at the expense of shareholder wealth. Absent mechanisms to control managerial behavior, usually called corporate governance structures, wealth maximization will not exclusively motivate decision-making. The banking industry's ongoing consolidation offers an excellent experimental setting for examining board effectiveness. This paper exploits the banking industry's recent M&As to explore what governance characteristics are associated with managers acting in shareholders' best interests. Banks provide a useful experiment because the burst of recent merger activity in this historically fragmented industry allows us to study a reasonably large sample of very homogeneous firms. …