Corporate Governance and Performance of Listed Commercial Banks during Financial Crisis: Evidence from China’s Banking Industry

Abstract

This paper examines the impact of corporate governance on bank performance. Using a sample of China’s listed commercial banks from years 2007 to 2009, we investigate how corporate governance practices affect the performance of China's listed banks during financial crisis. We use two-stage least squares (2SLS) regression to solve the well-known endogeneity problem in corporate governance literature, and compare our results to OLS regression of bank performance on governance mechanisms. A number of interesting findings are yielded in our study. First, there are an inverted U-shaped relation between board size and bank performance, and between proportion of independent directors and performance. Second, the banks whose controlling shareholder is the State can generate better performance than other banks. Third, the shareholding of the largest shareholder affects bank performance but its effect is non-linear, while the shareholding of other large shareholders affects negatively on the bank performance. Fourth, executive compensation incentives have a significant positive impact on bank performance. Our results are robust to various specifications.