Corporate Governance and The Risk-Taking Behavior Of Banks

Abstract

In the world of banking, risk-taking is a normal activity that facilitates the process in generating capital appreciation for investors. This risk-taking agenda has increased governance concerns and thus the relationship between shareholders and managers remains uncertain. Therefore, this study sought to provide a deeper understanding while establishing the relationship between corporate governance and the risk-taking behavior of banks in the Sub-Saharan Africa. The study considers reducing existing gap by probing into the extent to which corporate governance (measure by board strength, power held by the Chief Executive Officer and presence of quality auditors) influences the risk-taking decision of banks in sub-Sahara Africa. With a dataset of 442 banks (sample of 3035 observation) in 25 Sub-Saharan African countries within a period of eight years ranging from 2006-2013, the study employs a GLS-RE quantitative econometric technique. The study found board size (measured by log of board sizes and board size squared) to insignificantly explain risk-taking behavior of banks. Again, the study suggest board independent (negatively) and non-executive members (positively) of banks to be significantly related to the dependent variable, whereas CEO power of banks in sub-Sahara Africa had no significant relationship to risk-taking. Finally, the study also found auditors (as measured as the quality of audit from the big four) to have a negative statistical significance on the risk-taking behavior, thus, opinions from the big four auditing firms on the true and fairness of financial information is significant in reducing the risk-taking decisions of banks. From the findings it was revealed that bank board is very significant to bank risk-taking in Sub-Saharan African, therefore it is recommended that regulators need to monitor more intensely banks within the region where both shareholders and managers interests are aligned in an attempt to control their potential for unnecessary or excessive risk-taking. Future studies should consider the broader African spectrum as well as a comparison of public and non-public banks in the sub-region.