Executive Compensation, Ownership Structure and Loan Quality of Banks in Ghana

Abstract

Motivated by the need to analyze the effect of effective corporate governance mechanisms on the enhancement of the loan quality of banks in emerging economies, this study aims to analyze the effects of executive compensation and ownership structures of Ghanaian banks on the quality of loans. It also examines the moderation effect of ownership structure on the relationship between compensation and loan quality. The study uses a panel data on 26 Ghanaian banks over the period, 2003-2011.The ratio of non-performing loans to gross loans and advances which served as a measure of loan quality is the dependent variable while executive compensation and various ownership structures are the main independent variables. The findings of the study reveal that management is efficient when director shareholding is very prominent in banks. Institutional ownership and public listing of banks are also found to enhance loan quality through better monitoring and governance while lag of NPL, exchange rate depreciation and increases in net interest margins are as well seen to improve loan quality. No significant relationship is found between the interaction terms and non-performing loans, hence, loan quality in Ghana is not sensitive to the relationship between executive compensation and ownership structures.