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Please use this identifier to cite or link to this item: http://bura.brunel.ac.uk/handle/2438/4777

Title: Corporate governance and bank capital: Evidence from a cross-country analysis
Authors: Afolabi, Adeoye Amuda
Advisors: Skerratt, L
Pal, S
Keywords: Family ownership
Control rights
Cash flow rights
Leverage
OLS
Publication Date: 2010
Publisher: School of Social Sciences Theses
Abstract: The objective of this study is to provide empirical evidence on how owners of family managed firms affect bank leverage in family owned and managed firms. In addition, to assess the effect when a control right of the controlling owner exceeds cash flow rights which give rise to the agency problem in a bank with ownership concentration on bank leverage. Using cross-country bank-level data from Caprio et.al (2007) the study revealed that family- owner managed firms tend to have lower debt and this supports the hypothesis that bank leverage is likely to be lower in owner managed family firms. Furthermore, using equity ratio as an alternative indicator of bank leverage, the result indicates that family owner managed firms have a positively significant impact on bank leverage. This suggests that in a family- owner managed firm there is always a higher level of equity to finance the asset of banks in order to make sure the asset base of the bank is strong. This further strengthen the position of our result when using liability ratio in term of leverage where the inverse relationship between leverage and family-owner managed firms is interpreted as dependence on equity rather debt. Therefore, this implies that family owner managed firms prefer lower bank leverage. Moreover, higher control rights than cash flow rights give rise to a serious agency problem, as a result the control rights of the controlling owner exceeds cash flow rights has a significant positive relationship on bank leverage in term of liability ratio, and a significant negative relationship on bank leverage in term of equity ratio. This finding which uses the liability ratio in term of leverage further explained that bank leverage is higher when control rights of the controlling owner exceeds cash flow rights. The result also suggests that for firms where control rights of the controlling owners exceed cash flow rights, the equity is lower so they will prefer debt financing because of the fear of losing control. Situations like this are associated with an over- reliance on debt due to large shareholders being unwilling to dilute their ownership, generally this known as non-dilution of entrenchment. This implies that bank leverage is higher if control exceeds cash flow rights. However, this study recommends that there should be more dilution of ownership in family-owner managed firms so those minority owners are not exploited. In addition, controlling shareholder should not allow excessive building up of bank leverage because too much debt may lower bank valuation. Consequently, banks need to be better regulated furthermore excessive leverage has been identified as one of the reasons for the current financial crisis.
Description: This thesis was submitted for the degree of Master of Philosophy and awarded by Brunel University, 14/12/2010.
URI: http://bura.brunel.ac.uk/handle/2438/4777
Appears in Collections:School of Social Sciences Theses
Economics and Finance

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