The Roles of Corporate Governance in Bank Failures During the Recent Financial Crisis. Online Appendix

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1 1 The Roles of Corporate Governance in Bank Failures During the Recent Financial Crisis Berger, Allen N. 1 Imbierowicz, Björn 2 Rauch, Christian 3 Online Appendix 1 Corresponding author. University of South Carolina, Moore School of Business, 1014 Greene Street, Columbia, SC, USA, Phone: , Wharton Financial Institutions Center, and European Banking Center, aberger@moore.sc.edu 2 Copenhagen Business School, Finance Department and Center for Financial Frictions (FRIC), Solbjerg Plads 3, 2000 Frederiksberg, Copenhagen, Denmark, bi.fi@cbs.dk 3 University of Oxford, Saïd Business School, Park End Street, Oxford, OX1 1 HP, United Kingdom, christian.rauch@sbs.ox.ac.uk

2 2 Online Appendix Table A1 Addition to Table 5 Regression Results This table reports in Panel A1 and A2, Model I in Panel B, and Panels C and D results from logit regressions of bankruptcy indicators on predictor variables. All variables are defined in Table 1. Robust standard errors are employed and clustered at the bank level. Model II in Panel B shows results of a probit regression model with sample selection following Heckman (1979) and includes standard errors derived via the Huber (1967) White (1980) sandwich estimator, clustered at the bank level. The selection equation is Corporate Governance Data available = α + β 1*ln(Assets) + β 2*(ln(Assets)) 2 + β 3*Real Estate Loans + β 5*Cumulative Operating Income from 2004:Q1- + β 5*Agricultural Loans + β 6*Commercial Loans + β 7*Individual Loans+ β 8*Public Bank + β 9*Multibank Holding Company + β 10*OCC + β 11*FED, where the operating income and the loan variables are employed relative to a bank s total assets and total loans, respectively. We also report the results for the Wald test of no sample selection bias, i.e. the p-value for the null of no correlation between the errors of the selection equation and the regression model. SIFIs (systemically important financial institutions) in Panel C are defined as banks with assets larger than $50bn. in at least one quarter in our time period. The statistical significance of results is indicated by * = 10% level, ** = 5% level and *** = 1% level. Panel A1: Variation of Specifications in Panel A Total Assets ($-Thd.) I II 1 Year 2 Years 1 Year 2 Years Outside Directors CEO Other higher-level Mgmt * 7.044*** ** Lower-level Mgmt ** 2.508*** 4.657*** Outside Directors CEO Other higher-level Mgmt Lower-level Mgmt Other TARP Public Bank 1.689*** 1.565*** 1.911*** Multibank Holding Company Outside Directors/Board Higher-level Mgmt./Board Lower-level Mgmt./Board log(board Size) ** ** Chairman is CEO ** ** * log(assets) ** * ** * * Capital Ratio *** *** 5.737** Total Loans excl. C&D/Assets ** * C&D Loans/Assets 8.054*** *** *** 5.607** 9.473*** *** Loan Concentration ** * ST Deposits/Assets ** ** *** ** Brokered Deposits/Assets E Return on Assets *** *** * *** ** ** Non-perform. Loans/Assets ** * *** *** * Loan Growth *** ** *** * MBS/Assets * Unused Commitm./Assets * *** * Constant *** Observations 5,804 5, ,201 3, Number of Defaults McFadden's adjusted Pseudo R-squared 36.6% 19.1% 47.1% 39.6% 21.9% 53.9%

3 Panel A2: Variation of Specifications in Panel A Total Assets ($-Thd.) Stock & Awards / Total Bonus / Total 3 III IV 1 Year 2 Years 1 Year 2 Years Outside Directors ** CEO Other higher-level Mgmt ** 7.265*** ** 0.791* 7.068*** * Lower-level Mgmt *** 2.440*** 6.172*** 2.790*** 2.105** 9.903** Outside Directors CEO Other higher-level Mgmt Lower-level Mgmt ** Other TARP ** Public Bank 1.737*** 1.623*** 2.343*** ** 3.137*** Multibank Holding Company Variable Variables Outside Directors * CEO Other higher-level Mgmt Lower-level Mgmt ** CEO Other higher-level Mgmt ** * Lower-level Mgmt * *** Outside Directors/Board Higher-level Mgmt./Board *** Lower-level Mgmt./Board log(board Size) ** ** Chairman is CEO ** ** * * ** * log(assets) ** ** * * Capital Ratio *** 5.118* ** Total Loans excl. C&D/Assets * C&D Loans/Assets 4.893** 9.481*** *** *** *** Loan Concentration ST Deposits/Assets *** ** *** Brokered Deposits/Assets ** Return on Assets *** *** * *** ** ** Non-perform. Loans/Assets *** *** *** ** Loan Growth *** *** *** MBS/Assets Unused Commitm./Assets * * ** 9.104** Local Market Power * (Local Market Power) Comps.' Subprime Exposure *** House Price Inflation *** %-Change in GDP *** OCC 1.195** 0.927* FED Constant 3.824*** * Observations 4,201 3, ,290 3, Number of Defaults McFadden's adjusted Pseudo R-squared 38.7% 21.4% 54.5% 41.5% 25.8% 52.3%

4 Panel B: Full Specification of Panel B log ($- Ownership) log ($- Holdings) Stock & Awards / Total Bonus / Total 4 I II Heckman Selection Model 1 Year 2 Years 1 Year 2 Years Outside Directors CEO ** Other higher-level Mgmt * 0.097** 0.719*** 0.027* 0.037** 0.281*** Lower-level Mgmt ** 0.066* 0.128** 0.052** 0.023** 0.015*** Outside Directors 0.284*** 0.263** 0.303* 0.090* 0.110*** CEO * ** Other higher-level Mgmt * Lower-level Mgmt * Other TARP *** Public Bank *** 1.316*** 0.793* 3.072*** Multibank Holding Company 1.312*** 1.153** 5.397*** 0.504** 0.485** 2.293** Variable Variables Outside Directors 2.686* ** 0.843* CEO ** Other higher-level Mgmt Lower-level Mgmt * CEO Other higher-level Mgmt Lower-level Mgmt *** ** Outside Directors/Board Higher-level Mgmt./Board *** *** Lower-level Mgmt./Board log(board Size) * ** Chairman is CEO ** ** ** ** ** ** log(assets) Capital Ratio *** ** ** ** Total Loans excl. C&D/Assets C&D Loans/Assets *** *** *** *** Loan Concentration * ** ST Deposits/Assets *** *** * Brokered Deposits/Assets 5.078** *** Return on Assets *** *** ** * *** Non-perform. Loans/Assets *** *** 6.520* *** Loan Growth *** * *** *** MBS/Assets * Unused Commitm./Assets ** ** Local Market Power ** ** *** * (Local Market Power) ** * 9.604** ** Comps.' Subprime Exposure ** * *** ** House Price Inflation *** * *** * %-Change in GDP *** *** OCC 1.346*** 1.376** 3.205* 0.599*** 0.617*** 1.388** FED ** * Constant * *** Observations 3,290 3, ,586 78,319 4,198 Censored Observations 75,296 75,222 4,006 Uncensored Observations 3,290 3, Number of Defaults McFadden's adj. Pseudo R-squared: Wald test of indep. eqns. (rho = 0): 40.5% 26.8% 52.5% 45.06% 33.73% 56.38%

5 Panel C1: Robustness Tests Total Assets ($-Thd.) Stock & Awards / Total Bonus / Total 5 II. Excluding Multibank III. Excluding Banks I. Excluding SIFIs Holding Companies which received TARP 1 Year 2 Years 1 Year 2 Years 1 Year 2 Years Outside Directors ** ** ** CEO Other higher-level Mgmt * 6.914*** * 0.312** 8.617*** 1.101** 6.187*** Lower-level Mgmt *** 2.122** *** 4.160*** 1.413** 2.476** 2.300** Outside Directors ** CEO Other higher-level Mgmt Lower-level Mgmt * Other TARP ** * Public Bank ** 4.641*** Multibank Holding Company Variable Variables Outside Directors 2.930* ** 4.073** CEO Other higher-level Mgmt Lower-level Mgmt CEO * *** Other higher-level Mgmt Lower-level Mgmt *** Outside Directors/Board Higher-level Mgmt./Board *** Lower-level Mgmt./Board * ** log(board Size) Chairman is CEO * * * * ** log(assets) * Capital Ratio *** *** ** Total Loans excl. C&D/Assets C&D Loans/Assets *** *** *** *** Loan Concentration ST Deposits/Assets *** *** ** *** * Brokered Deposits/Assets 4.869** * 7.175*** * Return on Assets *** ** *** *** ** ** *** Non-perform. Loans/Assets ** * ** *** Loan Growth *** *** *** MBS/Assets Unused Commitm./Assets ** ** ** * ** Local Market Power * (Local Market Power) Comps.' Subprime Exposure *** *** *** House Price Inflation *** *** *** %-Change in GDP *** *** *** OCC 1.188** 0.947* ** 0.952* 1.239** 1.184** FED ** Constant 8.693* * ** Observations 3,143 2, ,849 2,696 2,162 2,016 McFadden's adj. Pseudo-R2 41.0% 25.2% 53.0% 42.8% 25.3% 38.0% 23.4%

6 Panel C2: Robustness Tests Total Assets ($-Thd.) Stock & Awards / Total Bonus / Total 6 IV. All Commercial Banks V. Parsimonious Model VI. Including Accounting Information from 2004:Q1-1 Year 2 Years 1 Year 2 Years 1 Year 2 Years Outside Directors ** * CEO Other higher-level Mgmt ** 6.793*** *** 0.319* 7.496*** Lower-level Mgmt *** 2.025** 5.592*** 2.346** 2.401** Outside Directors * CEO Other higher-level Mgmt Lower-level Mgmt Other TARP ** ** Public Bank ** 2.598*** * Multibank Holding Company Variable Variables Outside Directors * CEO Other higher-level Mgmt Lower-level Mgmt CEO Other higher-level Mgmt * Lower-level Mgmt *** Outside Directors/Board Higher-level Mgmt./Board 1.072* *** Lower-level Mgmt./Board 1.412* log(board Size) Chairman is CEO ** ** * log(assets) *** *** *** ** *** Capital Ratio *** *** ** *** Total Loans excl. C&D/Assets C&D Loans/Assets 7.906*** 9.635*** *** 3.706*** 8.654*** *** *** Loan Concentration ST Deposits/Assets *** *** *** *** * *** ** Brokered Deposits/Assets * 4.253** * Return on Assets ** ** *** *** ** * *** *** Non-perform. Loans/Assets *** ** ** *** Loan Growth *** 5.495*** *** *** *** MBS/Assets Unused Commitm./Assets 0.562** 0.205** 0.470*** ** ** ** Local Market Power * ** (Local Market Power) ** ** Comps.' Subprime Exposure *** * *** *** *** House Price Inflation *** *** *** *** %-Change in GDP *** *** *** *** OCC 0.586** 0.579*** 0.496* 0.879** 0.678* ** 1.601*** FED Constant 4.381** ** * Observations 39,274 38,576 2,154 3,290 3, ,290 3,097 Number of Defaults McFadden's adj. Pseudo-R2 40.5% 28.2% 41.4% 45.20% 29.80% 60.00% 40.8% 25.9%

7 Panel D: Holdings Normalization and Excluding Variable Stock & Awards / Total Bonus / Total 7 I II 1 Year 2 Years 1 Year 2 Years Outside Directors ** ** CEO Other higher-level Mgmt * 7.516*** ** 1.377** 7.560*** ** Lower-level Mgmt *** 2.019* 9.019** 2.771*** 1.969** 4.317*** Outside Directors CEO Other higher-level Mgmt Lower-level Mgmt Other TARP ** ** Public Bank * 2.265*** * 1.633** Multibank Holding Company Variable Variables Outside Directors 3.065* CEO Other higher-level Mgmt Lower-level Mgmt CEO Other higher-level Mgmt Lower-level Mgmt ** Outside Directors/Board Higher-level Mgmt./Board ** ** Lower-level Mgmt./Board log(board Size) Chairman is CEO * * log(assets) Capital Ratio ** *** Total Loans excl. C&D/Assets C&D Loans/Assets *** *** *** *** Loan Concentration * ST Deposits/Assets *** *** Brokered Deposits/Assets 4.746** ** Return on Assets *** ** * *** ** * Non-perform. Loans/Assets *** ** *** ** Loan Growth *** ** MBS/Assets Unused Commitm./Assets * ** 8.174* ** ** Local Market Power * * (Local Market Power) * Comps.' Subprime Exposure *** *** House Price Inflation *** *** %-Change in GDP *** *** OCC 1.180** 0.894* ** 0.799* 1.336* FED Constant 7.972* * Observations 3,290 3, ,290 3, Number of Defaults McFadden's adj. Pseudo-R2 41.4% 26.0% 51.8% 42.9% 27.5% 52.2%

8 8 Online Appendix Table A2 Addition to Table 7 Regression Results for Accounting Measures of Bank Risk This table reports results for measures of bank risk using data from 2004:Q1 to 2010:Q3. The measures are the capital ratio, non-performing loans to total assets, the return on assets (RoA), all defined as in Table 1, as well as the non-interest income to total assets as reported on the balance sheet and the natural logarithm of the Z- score. The natural logarithm of the Z-score is defined as the sum of the capital ratio and the RoA divided by the standard deviation of the RoA over the previous 8 quarters. All Panels report cross-sectional regression results of risk measures on control variables measured in. To account for potential endogeneity we also show specifications excluding in Panel A the capital ratio, in Panel B Non-perform. Loans/Assets, in Panel C the capital ratio and the return on assets, and in Panel D the return on assets. For the derivation of the respective dependent variables at the bank-level we use the period 2007:Q1 to 2010:Q3 and in Panels B1 and B3 quarterly differences of the Capital Ratio and the natural logarithm of the Z-score, respectively, where all other panels use quarterly data of non-performing loans to total assets, the return on assets and non-interest income to total assets, respectively. For the kurtosis we use the excess kurtosis. Standard errors are robust to heteroscedasticity and statistical significances indicated by * = 10% level, ** = 5% level and *** = 1%.

9 Panel A: Capital Ratio Dependent Variable from 2007:Q1 to 2010:Q3 Mean St. Dev. Skew Kurtosis Minimum Independent Variables I II III IV V VI VII VIII IX X Total Assets ($-Thd.) 9 Outside Directors ** ** ** CEO Other higher-level Mgmt *** *** * * 7.502*** 7.711*** ** * Lower-level Mgmt * * Outside Directors CEO Other higher-level Mgmt Lower-level Mgmt * 0.984* Other Public Bank ** *** * Multibank Holding Company ** *** 0.003** 0.004** * ** * ** *** Outside Directors/Board 0.059** Higher-level Mgmt./Board ** 0.003* 0.004** ** 1.912** * ** Lower-level Mgmt./Board * * log(board Size) * Chairman is CEO ** 0.653** log(assets) 0.007*** 0.010*** * 0.277* Capital Ratio *** 0.041*** ** *** Total Loans excl. C&D/Assets * * C&D Loans/Assets *** ** 0.013** 0.011** * *** ** Loan Concentration ST Deposits/Assets Brokered Deposits/Assets Return on Assets 0.649** *** *** Non-perform. Loans/Assets Loan Growth ** ** MBS/Assets ** ** Unused Commitm./Assets Local Market Power ** ** * 0.086** (Local Market Power) * 0.046* * Comps.' Subprime Exposure ** House Price Inflation * %-Change in GDP OCC FED * 0.002** * * Constant *** ** ** Observations Adjusted R-Squared

10 10 Panel B: Non-performing Loans / Total Assets Dependent Variable from 2007:Q1 to 2010:Q3 Mean St. Dev. Skew Kurtosis Maximum Independent Variables I II III IV V VI VII VIII IX X Total Assets ($-Thd.) Outside Directors 0.370*** 0.373*** 0.019*** 0.019*** *** 0.056*** CEO * * Other higher-level Mgmt ** 0.768*** 0.050** 0.050** * 0.107* Lower-level Mgmt * 1.559* Outside Directors *** 2.299*** 4.360*** 4.389*** CEO Other higher-level Mgmt Lower-level Mgmt ** 0.621** Other Public Bank ** 0.003** ** 0.009** Multibank Holding Company * 0.014* Outside Directors/Board Higher-level Mgmt./Board Lower-level Mgmt./Board log(board Size) Chairman is CEO log(assets) Capital Ratio 0.940*** 0.919*** 0.088*** 0.088*** *** 0.214*** Total Loans excl. C&D/Assets ** C&D Loans/Assets 1.171*** 1.226*** 0.114*** 0.115*** * *** 0.310*** Loan Concentration ST Deposits/Assets * 0.015* ** 0.047** Brokered Deposits/Assets Return on Assets * ** ** ** ** Non-perform. Loans/Assets 6.337** ** Loan Growth MBS/Assets Unused Commitm./Assets Local Market Power (Local Market Power) Comps.' Subprime Exposure * * House Price Inflation * * %-Change in GDP OCC * 0.009* FED Constant *** 4.682*** Observations Adjusted R-Squared

11 11 Panel C: Ln(Z-Score) Dependent Variable from 2007:Q1 to 2010:Q3 Mean St. Dev. Skew Kurtosis Minimum Independent Variables I II III IV V VI VII VIII IX X Total Assets ($-Thd.) Outside Directors * * CEO * * Other higher-level Mgmt Lower-level Mgmt * * * 0.570** Outside Directors 0.164** 0.180** * ** * 0.293** 0.074* 0.082* CEO * Other higher-level Mgmt Lower-level Mgmt Other Public Bank Multibank Holding Company Outside Directors/Board *** 1.885*** Higher-level Mgmt./Board *** *** 0.203** 0.181* ** ** Lower-level Mgmt./Board log(board Size) Chairman is CEO * 0.323* log(assets) Capital Ratio * Total Loans excl. C&D/Assets C&D Loans/Assets *** *** 1.016*** 0.837*** * *** *** Loan Concentration ** ** ST Deposits/Assets ** * Brokered Deposits/Assets Return on Assets *** *** * *** Non-perform. Loans/Assets * Loan Growth * 0.581* 0.915** ** 3.693** ** MBS/Assets ** ** 1.369* 1.448* Unused Commitm./Assets Local Market Power (Local Market Power) Comps.' Subprime Exposure House Price Inflation %-Change in GDP OCC ** ** ** ** FED *** ** 0.120** 0.109** * * 0.820* ** ** Constant ** 6.900** Observations Adjusted R-Squared

12 12 Panel D: Return on Assets Dependent Variable from 2007:Q1 to 2010:Q3 Mean St. Dev. Skew Kurtosis Minimum Independent Variables I II III IV V VI VII VIII IX X Total Assets ($-Thd.) Outside Directors CEO Other higher-level Mgmt *** *** 0.036** 0.036** ** ** 2.854* 2.872* ** *** Lower-level Mgmt Outside Directors ** 0.017** * CEO Other higher-level Mgmt Lower-level Mgmt * * Other Public Bank ** ** 0.002* 0.002* * * Multibank Holding Company Outside Directors/Board Higher-level Mgmt./Board * * Lower-level Mgmt./Board log(board Size) Chairman is CEO ** * 0.264* 0.281** * 0.009* log(assets) Capital Ratio *** *** 0.075** 0.074** ** ** 7.179* 7.228* *** *** Total Loans excl. C&D/Assets C&D Loans/Assets *** *** 0.042*** 0.043*** ** ** *** *** Loan Concentration ST Deposits/Assets Brokered Deposits/Assets Return on Assets 3.840*** Non-perform. Loans/Assets * * Loan Growth MBS/Assets Unused Commitm./Assets * 0.006* * Local Market Power (Local Market Power) Comps.' Subprime Exposure House Price Inflation %-Change in GDP ** ** OCC * FED ** * * Constant * 4.693* Observations Adjusted R-Squared

13 13 Panel E: Non-Interest Income / Total Assets Mean St. Dev. Skew Kurtosis Minimum Independent Variables I II III IV V Outside Directors * * CEO Other higher-level Mgmt * Lower-level Mgmt ** 0.093** Total Assets ($-Thd.) Outside Directors * CEO Other higher-level Mgmt Lower-level Mgmt ** ** Other Public Bank Multibank Holding Company 0.025* Outside Directors/Board ** ** Higher-level Mgmt./Board * *** Lower-level Mgmt./Board * log(board Size) ** * Chairman is CEO * log(assets) 0.011*** * Capital Ratio Total Loans excl. C&D/Assets *** * C&D Loans/Assets *** * * *** Loan Concentration ST Deposits/Assets Brokered Deposits/Assets Return on Assets 1.867* 0.223* ** Non-perform. Loans/Assets * Loan Growth MBS/Assets *** * * Unused Commitm./Assets Local Market Power (Local Market Power) Comps.' Subprime Exposure House Price Inflation %-Change in GDP OCC ** ** FED Constant 0.171** 0.011** ** Observations Adjusted R-Squared

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