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CORPORATE GOVERNANCE, RISK-TAKING AND FIRM PERFORMANCE OF
ISLAMIC BANKS DURING GLOBAL FINANCIAL CRISIS
M. Kabir Hassan, Ph.D.
Professor of Finance and
Hibernia Professor of Economics and Finance
Department of Economics and Finance
University of New Orleans
New Orleans, LA 70148
Office Email: [email protected]
Alternate Email: [email protected]
Office Phone: 504-280-6163
Cell Phone: 610-529-1247
Sabur Mollah, Ph.D.
School of Business
Stockholm University
SE-106 91, Stockholm
Sweden
Phone: +468163034
E-mail: [email protected]
http://goog_516793021/mailto:[email protected]:504-280-6163tel:610-529-1247mailto:[email protected]
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CORPORATE GOVERNANCE, RISK-TAKING AND FIRM PERFORMANCE OF
ISLAMIC BANKS DURING GLOBAL FINANCIAL CRISIS
ABSTRACT
Manuscript Type: Empirical
Research Question/Issue: The global banking system virtually
halted during the recent
global financial crisis, but Islamic Banks were not as exposed
as much. We examine if a
multi-layer governance structure laced with Islamic ethical
banking principles was
responsible for preventing Islamic banks to fail during the
2007-2009 financial crisis.
Research Findings/Insights: Using a paired-sample of 84 Islamic
and conventional banks
from Bangladesh, Bahrain, Malaysia Pakistan, Saudi Arabia, the
United Arab Emirates, and
the United Kingdom over the period of 2006-2009, we find that
the corporate governance and
financial disclosure indices emerged as the key driving forces
for risk-taking for Islamic
banks.
Theoretical/Academic Implications: This research contributes to
the multi-layer corporate
governance model that is based on moral values as practiced in
Islamic banks can be an
effective governance mechanism in minimizing future financial
crises.
Practitioner/Policy Implications: Our findings cast doubt on the
independence of Shari’ah Boards. Multiple board positions limit
their ability to function as effective monitors as well as Islamic
value proposition quality controllers. Keywords: Corporate
Governance, Islamic Banks, Financial Crisis
JEL Classification Codes: G34, Y90, G01
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CORPORATE GOVERNANCE, RISK-TAKING AND FIRM PERFORMANCE OF
ISLAMIC BANKS DURING GLOBAL FINANCIAL CRISIS
INTRODUCTION
The Financial Crisis Inquiry Report (FCIC, 2011) concludes,
inter alia, that dramatic
failures of corporate governance and risk management of
financial institutions coupled with a
systematic breakdown in accountability and ethics were
responsible for the recent financial
crisis. The global banking system halted during the crisis, but
Islamic Banks (hereafter IBs)
were not exposed1. However, some of the world’s largest
financial institutions e.g., Lehman
Brothers and Merrill Lynch were bailed out during crisis. While
the causes of the crisis will
be debated for years to come, at least two questions have drawn
considerable attention among
academics, investors, and policy makers. First, how did the IBs
tackle the global financial
crisis? Second, what were the strengths in the governance system
of IBs?
IBs can be distinguished from their conventional counterparts
(hereafter CBs) in, at
least, two significant ways. Firstly, at the top of its
governance structure, IBs must institute a
supervisory board called the ‘Shari’ah Supervisory Board
(hereafter SSB)’, which acts as an
additional layer of governance2. SSB acts as an independent
control mechanism in restraining
the board of directors and other governance agents from engaging
in risk taking activities;
therefore, IBs board structure should be prevented from
aggressive risk taking during
financial turbulence like the crises. However, the SSB in IBs
board structure are morality and
ethics driven rather than greed; therefore, IBs boards mitigate
shareholders incentives since it
is achieved at the cost of tax payers or moral hazard or deposit
insurance, especially the IBs
board focuses on ensuring social justice. Thus, IBs board will
take fewer risks during the
financial turbulence and eventually IBs survive from financial
crisis. The same argument is
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also valid in case of the powerful CEOs in IBs. The powerful CEO
has the incentive to be
engaged in less risky investments (e.g., Hermalin and Weisbach,
1998; and Pathan, 2009) and
hence, the CEOs help mitigate financial fragility for the IBs
during crisis. However, due to
the Shari’ah restriction, the financial and risk disclosure, and
transparency levels are high in
IBs; therefore, higher level of disclosure and transparency help
IBs less risk-taking and
hence, IBs maximize shareholder value and performance. Based on
these arguments, we have
proposed a theoretical model for the IBs governance structure as
below (Figure 1).
Figure 1: Theoretical Model of the Governance Model for the
Islamic Banking
These distinctions between CBs and IBs are utilized in this
study to examine, firstly,
whether the multi-layer governance provided via the SSB acts as
an independent control
mechanism in restraining the board of directors or other
governance agents from engaging in
excessive risk taking. Secondly, the distinction between the
two-types of banking systems is
utilized to test whether IBs supposed adherence to ethical
conduct resulted in shielding them
from the devastating effects of the financial crisis and create
shareholder value and hence,
perform better during crisis. By analyzing the regression
results and survey responses, we
conclude that the corporate governance index (CGI) and financial
disclosure and
Shari'ah Supervisory
Board
• SUPRA AUTHORITY:
• Shari’ah Supervisoty Board (SSB) helps Islamic Banks adhere to
the morality and ethics rather than greed
• Shari'ah Supervisory Board (SSB) ensures social justice
Board of Directors
• ETHICS AND MORALITY DRIVEN BOARD:
• Refrain from Aggressive Risk Taking
• Eventually protect Islamic banks against fallibility during
unusual financial circumstances and help create shareholder value
and perform better
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transparency index (FDTI) emerged as the key driving force for
risk-taking behavior of IBs
during financial turbulence. However, the board structure of the
IBs is driven by the short-
term profitability during financial crisis. The current state of
the Shari’ah supervision (SSB)
pronounced as the weak indicator of the IBs governance
mechanism, which is blamed to be
the cause of poor performance of IBs governance mechanism.
Since, Shari’ah plays a vital
role in governance mechanism of IBs (Lewis, 2005), there was a
need in researching Shari’ah
governance and corporate governance together. In this respect,
this is the first study, which
captures both Shari’ah governance and corporate governance
together in determining the role
of SSB in the governance system of IBs. However, the pair sample
comparison in this study
help interprets the role of SSB more precisely.
The studies by Akhigbe and Martin (2008) and Pathan (2009)
highlight the disclosure
and governance practices and risk-taking behavior of US Banks
around Sarbanes-Oxley Act
2002, but nothing is done on the IBs governance and risk-taking.
Thus, none of these studies
is enough to understand the risk-taking behavior of IBs during
global crisis. Therefore, this
study brings new thoughts in the Islamic banking research.
However, the studies by Sierra et
al. (2006), Adams and Mehran (2012), Anders and Valledado
(2008), Wintoki et al. (2012),
Francis et al. (2012) and Pathan and Faff (2013) investigate the
governance mechanism and
firm performance/value, but nothing in this kind is conducted on
the IBs. Even though there
are some contradictions of results with the existing studies,
this study adds value in the
existing literature by producing empirical evidence between
governance and firm
performance/value for the IBs during financial crisis.
Nevertheless, this study develops four
distinct governance indices having thirty-two parameters, which
is extensive in terms of the
available literature either in traditional banking governance
literature or in Islamic banking
literature.
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The rest of the paper is organized as follows: section 2
presents the literature review
and hypotheses development; the data and methodology is
described in section 3; section 4
elaborates the empirical results; and concluding remarks are
reported in section 5.
REVIEW OF RELATED LITERATURE AND HYPOTHESES DEVELOPMENT
Corporate governance and bank risk-taking literature emphasizes
shareholder incentives and
managers’ incentives. Similar to the usual corporations, bank
shareholders have a preference
for excessive risk-taking due to the moral hazard problem and
limited liability, and convex
pay-off systems (Galai and Masulis, 1976; Jensen and Meckling,
1976; and John et al., 1991).
However, due to the higher level of information asymmetry in the
banking companies, the
dispersed and unsophisticated debt holders can not prevent the
shareholders from more risk
taking by initiating complete debt contracts on an ex-ante basis
(Dewatripont and Tirole,
1994). Therefore, bank shareholders have strong incentives for
excessive risky investments
so that they can maximize their potential benefits at the cost
of deposit insurance and tax-
payers money. Nevertheless, John et al. (1991) have concluded
that risk-adjusted deposit
insurance premium and risk-adjusted capital fail to mitigate the
moral hazard problem and
control banks’ risk taking incentives fully. Thus, bank
managers’ opportunistic behaviour
depends on the board structure.
Furthermore, agency conflict between shareholder-manager is a
central issue for the bank
governance because managers may not serve for the best interest
of the shareholders.
Therefore, a clear understanding about managers’ incentives
regarding bank risk-taking
should be elaborated. Managers’ wealth consists of a portfolio
of tangible and financial
assets, and human capital. Since managers’ wealth is
concentrated in the firms the managers
manage, managers protect their wealth internally by selecting
excessively safe assets or
diversification at the firm level (Smith and Srulz, 1985; and
May, 1995). Furthermore, tax
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shield and bankruptcy costs in the highly levered firms like
banks contribute management
incentives towards selecting overly safe projects rather than
excessively risky project (Parrino
et al., 2005). Managers’ risk-taking incentives differ depending
on their compensation
packages. In addition, bank managers are risk averse while their
compensation is based on
fixed salaries rather than through shares and option programs
because managers have little to
gain if banks do very well, but they have a chance to lose the
job when the bank fails
(Saunders and Cornett, 2006). Thus, shareholders and managers
incentives conflict since
shareholders want managers to invest in all positive net present
value projects, irrespective of
their level of risk (Guay, 1999) but bank managers accept some
safe, value-reducing projects,
and reject some risky, value increasing projects (May,
1995).
However, CEO power measured by CEO duality (Hermalin and
Weisbach, 2003; and Pathan,
2009) influences boards monitoring ability (Fama and Jensen,
1983; and Jensen, 1993), and
since CEOs has incentives to take less risk; therefore, CEO
power negatively affects bank
risk-taking. Board size negatively affect firm performance
(Hermalin and Weisbach, 2003)
due to coordination cost and free-riding problems and individual
directors incentives to
acquire information and monitor managers is low in large boards;
thus, CEOs find the large
boards control better (Jensen, 1993). Strong boards measured by
board size and board
independence (Pathan, 2009) are expected to be better monitor
bank managers for the
shareholders interest and hence, high risk-taking.
In addition, a sizeable literature investigates the relationship
between governance
mechanisms and firms’ performance and shareholder value for the
non-financial firms (see
Weir et al., 2002 and Stanwick and Stanwick, 2010), but the
empirical studies generate
inconclusive results (see Gani and Jermias, 2006; Larcker et
al., 2007; Stannwick and
Stanwick, 2010; and Bauer et al., 2008). Some studies provide
evidence showing a positive
effect of corporate governance on non-financial firm value (e.g.
Lee et al., 1992). However,
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some studies report a negative association between corporate
governance and firm value (e.g.
Hutchinson, 2002), while other studies find no impact of
corporate governance on firm value
(e.g. Gupta et al., 2009). But the empirical literature on
governance and performance or value
is limited on the banking sector except a few (for example
Sierra et al. 2006; Anders and
Valledado, 2008; Adams and Mehran, 2012; Francis et al. 2012;
Wintoki et al. 2012 and
Pathan and Faff, 2013). Sierra et al. (2006) suggest that strong
board improve bank
performance. Adams and Mehran (2012) also produce similar
results for board size, but they
fail to identify any relation between performance and
independent directors. Anders and
Valledado (2008), on the other hand, show a positive but concave
effect of both bank board
and independent directors on bank performance. Furthermore,
Wintoki et al. (2012) report no
relation between board size or board independence and firm
performance, but Francis et al.
(2012) show that better governed firms perform well during
financial crisis. In addition, the
financial stability and risk taking is a serious research issue
during global financial problem.
Akhigbe and Martin (2008) and Pathan (2009) study the board
structure and bank risk-taking,
especially capital regulations, charter value, market discipline
and ownership structure as the
controlling mechanisms were captured in their studies.
Despite the fact that there are a few studies recently published
on banking governance, risk-
taking and performance, the literature on Islamic banking
governance is very limited.
Safieddine (2009) has stressed that the corporate governance
mechanism in Islamic banking
is unique, which is adhere to Shari’ah governance (Abu-Tapanjeh,
2009; and Chowdhury and
Hoque, 2006) and hence, Shari’ah board plays a vital role in the
governance mechanisms of
the Islamic banking (Lewis, 2005). Thus, corporate governance
research should analyze
Shari’ah governance alongside to get a complete picture of the
governance mechanism of
Islamic banking. The existing literature on corporate governance
of Islamic banking (e.g.,
Abu-Tapanjeh, 2009; Chowdhury and Hoque, 2006; and Lewis, 2005)
addressed the
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theoretical viewpoints of the governance mechanisms of Islamic
banking. However,
Safieddin (2009) has studied the agency framework related to the
cash flow and control rights
of investors based on a survey over Saudi Arabia, Kuwait, Qatar,
Bahrain, and United Arab
Emirates. Furthermore, the research on the Shari’ah governance
is also very limited. Grais
and Pellegrini (2006) and Hasan (2011) have studied the
theoretical aspects of the Shari’ah
governance of Islamic banking. Therefore, the existing
literature on corporate governance is
not only limited but also has failed to link Shari’ah governance
and corporate governance
mechanisms of the Islamic banking. However, there is no study
found on the risk taking,
governance mechanism and performance of IBs during the financial
crisis; therefore, this area
urges a need for research.
We assume that the monitoring ability of the Shari’ah
Supervisory Board (SSB) in restraining
IBs from Shari’ah incompliant products and hence, refraining
from excessive risk taking and,
in turn, help perform better. This paper investigates the role
of Shari’ah backed Islamic
banking governance mechanism and the role of SSB on risk-taking
and firm performance of
IBs during the financial crisis implementing the following
hypotheses:
Hypothesis 1: There is no relationship between governance
structure of IBs and risk-taking.
Hypothesis 2: There is no relationship between governance
structure of IBs and firm
performance.
Hypothesis 3: There is no relation between Shari’ah Supervisoty
Board (SSB) and the risk-
taking of IBs.
Hypothesis 4: There is no relation between Shari’ah Supervisoty
Board (SSB) and the firm
performance of IBs.
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DATA AND METHODOLOGY
We primarily looked into BankScope database for the banking
data. There are 147 Islamic
Banks listed in the BankScope database, but a large number of
IBs do not fully involve into
the Shari’ah compliant products. Moreover, there are plenty of
missing data in the
BankScope database for the Islamic Bank. Therefore, we collected
data by hand from the
Islamic Banks, which fully provide Shari’ah compliant products.
We include 59 Islamic
Banks in the sample. In addition, we collected the corporate
governance data from the annual
reports of these banks. We match the conventional banks from the
same country comparing
the similar size, but were able to match only 25 conventional
banks. The data consists of 84
banks (59 Islamic and 25 Conventional) from Bangladesh, Bahrain,
Malaysia, Pakistan,
Saudi Arabia, The United Arab Emirates, and The United Kingdom
over the period of 2006-
2009. In addition, we have conducted an extended questionnaire
survey over the Shari’ah
board members from the sample Islamic banks. We sent 47
questionnaires to the Shari’ah
scholars during April-July, 2012 to Bangladesh, Bahrain,
Malaysia, Pakistan and the UK. The
Shari’ah governance data from the survey has been included in
the analysis to test hypotheses
3 and 4.
Measures of Dependent Variables:
This paper investigates risk-taking and firm performance/value
by the IBs governance
structure. The risk-taking variable is defined as investment in
risky assets and securities to
total loans. The firm performance is measured using return on
equity (ROE) and return on
assets (ROA). The ROE is calculated as net income divided by
total equity and ROA is
calculated as net income divided by total assets. The similar
proxies are implemented by
Hutchinson and Gul (2004) and Gani and Jermias (2006). The paper
uses Tobin’s Q as a
market-based measure of firm value. Tobin’s Q is calculated as
the Market-to-Book-Value of
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the equity ratio. The similar proxy for firm value is also
implemented by Yermack (1996),
Weir et al. (2002), and Haat et al. (2008).
Measures of Explanatory Variables:
To capture the corporate governance structure, we construct four
indices. The indices are
board structure index (BSI), financial disclosure and
transparency index (FDTI), risk
disclosure index (RDI) and corporate governance index (CGI). The
BSI, FDTI, and RDI are
the sub-indices; therefore, CGI constitutes all the three
indices. The BSI constitutes sixteen
different aspects of board and CEO structure. The FDTI, on the
other hand, contents eleven
components of the audit firm/committee, risk committee, and
Shari’ah committee. In
addition, the RDI contents the disclosure of the five key risk
parameters. Furthermore, the
CGI consists of all thirty-two characteristics, which contents
the BSI, FDTI, and RDI.
Finally, the SSB (Shari’ah Supervisory Board) is introduced as a
dummy variable in the
model. The other explanatory variables including firm and
country specific variables are
described in Table 1.
_____________________
Insert Table 1 about here
_____________________
To test the hypotheses (H1-H43), we use the following models
(1)-(2):
Model 1
Yb,c,t=α0+α1*BSIb,c,t+α2*FDTIb,c,t+α3*RDIb,c,t+β1*SSBb,c,t+γ*Xb,c,t+δ*MEc,t+
εb,c,t…(1.1)
Yb,c,t=α0+α1*CGIb,c,t+ β1*SSBb,c,t+γ*Xb,c,t+δ*MEc,t
+εb,c,t…(1.2)
Yb,c,t=α0+α1*CGb,c,t+ β1*SSBb,c,t+γ*Xb,c,t+δ*MEc,t
+εb,c,t…(1.3)
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Where
Yb, c,t is the proxy for the Risk-taking for bank b in country c
at time t,
BSIb,c,t is the Board Structure Index of bank b in country c at
time t,
FDTIb,c,t is the Financial Disclosure and Transparency Index of
bank b in country c at
time t,
RDIb,c,t is the Risk Disclosure Index of bank b in country c at
time t,
CGIb,c,t is the Corporate Governance Index of bank b in country
c at time t,
CGb,c,t is the Corporate Governance variables (Board and CEO
related) of bank b in
country c at time t,
SSBb,c,t is the Shari’ah Supervisory Board variables for bank b
in country c at time t,
Xb,,c,t is a matrix of firm level variables (asset size, tier1
capital, and leverage),
MEc is a matrix of country level macroeconomic variables,
and
b,c,tis the error term. α0 is the constant and , , , and are the
vectors of coefficient
estimate.
Model 2
Yb,c,t=α0+α1*BSIb,c,t+α2*FDTIb,c,t+α3*RDIb,c,t+β1*SSBb,c,t+γ*Xb,c,t+δ*MEc,t+
εb,c,t…(2.1)
Yb,c,t=α0+α1*CGIb,c,t+ β1*SSBb,c,t+γ*Xb,c,t+δ*MEc,t
+εb,c,t…(2.2)
Yb,c,t=α0+α1*CGb,c,t+ β1*SSBb,c,t+γ*Xb,c,t+δ*MEc,t
+εb,c,t…(2.3)
Where
Yb, c,t is the proxy for the firm value (Tobin’s Q) and/or Firm
Performance (ROE and
ROA) for bank b in country c at time t,
BSIb,c,t is the Board Structure Index of bank b in country c at
time t,
FDTIb,c,t is the Financial Disclosure and Transparency Index of
bank b in country c at
time t,
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RDIb,c,t is the Risk Disclosure Index of bank b in country c at
time t,
CGIb,c,t is the Corporate Governance Index of bank b in country
c at time t,
CGb,c,t is the Corporate Governance variables (Board and CEO
related) of bank b in
country c at time t,
SSBb,c,t is the Shari’ah Supervisory Board variables for bank b
in country c at time t,
Xb,,c,t is a matrix of firm level variables (asset size, tier1
capital, and leverage),
MEc is a matrix of country level macroeconomic variables,
and
b,c,tis the error term. α0 is the constant and , , , and are the
vectors of coefficient
estimate.
Estimation Method
In estimating the above equations we use OLS. We attempted to
apply Random-effect
GLS (Baltagi and Wu, 1999) and fixed effect panel data analysis
method, but neither of those
were appropriate with our data for several reasons: First, the
time-invariant parameter like
religion cannot be estimated with fixed-effect. Second, the
board structure variables
(BOARD and INDEP), CEO power (CEO_CHAIR, CEO_INTERNAL) etc. do
not vary
much over time, where the fixed-effect estimation should be
inappropriate (Wooldridge,
2002, p. 286). Hence applying fixed-effect estimations would
lead to massive loss of the
degrees of freedom (Baltagi, 2005, p. 14).
Description of the Data:
Table 2 presents descriptive statistics of the variables. The
mean value of Tobin’s Q is
19.09% for the Islamic sample and 0.01% for the Conventional
pair, with standard deviations
of 22.61% and 0.02%. Return on assets (ROA) and return of equity
(ROE) are 5.18% and
33.51% for the Islamic sample and ROA and ROE for the
Conventional pair are 0.89% and
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14.79%. The market values of both the Islamic and Conventional
pair are significantly
undervalued. This could be due to sample selection, because all
but one belongs to emerging
economies. However, returns (ROA and ROE) are significantly
higher in the Islamic banks,
compared to the Conventional pair. Previous studies prominently
identify Islamic banks as
being highly profitable, compared to Conventional banks. This
study supports the previous
evidence. BSI, FDTI, and RDI are the sub-indices for composite
corporate governance index
‘CGI’. Islamic banks produce worse governance indicators (e.g.,
BSI = 0.2856, FDTI =
0.3105, RDI = 0.4851, and CGI = 0.3253), compared to the
Conventional pair. These primary
results help in the interpretation that the governance system in
Islamic banks is worse,
especially the governance indices, compared to that of their
pairs. But, we see a different
picture while we consider the board and CEO specific variables.
Despite the fact that board
size and CEO-chair variables are insignificant, the board
independence and internal CEO
(CEO-exe) are significantly different in IBs compared to the
CBs, which indicate that the
boards are strong and the CEOs are powerful in IBs. However, we
select the Conventional
pair very carefully by considering approximately the same size
and location; therefore, we
can see that the sizes for both the samples are approximately
similar. Noticeably, we find that
Islamic banks’ exposures to risky securities are 27.15% whereas
their Conventional pair
invests only 2.90%. Financial leverage is more or less similar
for both banking practices.
Nevertheless, we can see that the capital adequacy ratio (Tier 1
Capital) in Islamic banks is
significantly different from their Conventional pair, which
indicates excess liquidity in
Islamic Banks.
_____________________
Insert Table 2 about here
_____________________
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EMPIRICAL RESULTS
Correlation Analysis
Table 3 presents the correlation matrix for both the samples in
the study. The market
based performance variable ‘Tobin’s Q’ is positively related to
the board structure index
‘BSI’, the financial disclosure and transparency index ‘FDTI’,
and the overall governance
index ‘CGI’ and board independence but negatively related to the
risk disclosure index
‘RDI’, board size, CEO variables (CEO-Chair and CEO-EXE) for the
Islamic banks sample.
On the other hand, Tobin’s Q is negatively related to all the
corporate governance
indices/variables except RDI and board independence in the
Conventional sample. These
correlation coefficients indicate that the corporate governance
initiatives are value
accelerating for Islamic banks, but value destructing for
Conventional banks. However, risk
disclosure is value depreciating for both samples.
The story is opposite when we view the accounting based
performance or return
variables. The return variables are positively related to BSI,
FDTI, and board structure
variables, but negatively related to RDI and CEO variables for
the IBs. However, the results
are mixed in case of Conventional banks. These results create
confusion. The Islamic banks
are more profitable than the Conventional pair and the
governance mechanisms, especially
board structure is the key driving force for financial
performance. However, financial
disclosure may have played a significant role for the
performance of Islamic banks.
Scholars broadly agree that Islamic banks follow the Basel
accord strictly and, Islamic
banks have plenty of customers and hence deposits as a result of
adherence to faith-based
investing. However, practitioners express the view that Islamic
banks never fall below
minimum capital requirements and have excess liquidity. These
are said to be the key success
indicators for the Islamic banks. This is reflected in the
relationships between tier 1 capital
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and the financial leverage variables (Table 3, PANEL A).
_____________________
Insert Table 3 about here
_____________________
Results for Risk-Taking and Corporate Governance
We conduct panel data analysis to investigate the relationship
between risk exposure
and the corporate governance indicators/variables for the 84
Islamic and conventional banks
over the 2006-2009. Corporate governance indices (BSI, FDTI,
RDI, and CGI), board
structure and CEO variables are tested against firm risk taking
in models 1.1-1.3. The results
of the model for both Islamic and conventional banks are
presented in Table 4. All models
are fitted with pooled OLS method4. The F-statistics for all
models are highly significant,
which indicate the OLS pooled regression is the right choice.
The results show that the CGI
and FDTI are highly significant, which indicate that the
corporate governance mechanism as
a whole and financial disclosure and transparency in particular
emerged as the key driving
force for risk taking for Islamic banks. Similarly, the
full-sample finds positive (significant)
results for CGI and FDTI. However, board size influences
risk-taking for the full-sample
(Panel C). Scholars generally argue that the risk exposure of
Islamic banks is not high, due to
Shari’ah prohibition, but the reality is little different. We
argue that Shari’ah prohibition may
restrict Islamic banks in investing the products and services
having ‘excessive uncertainty
(gharar)’, but short-term profitability may be the key
motivation for the risk-taking.
Nevertheless, the board structure and CEO power variables seem
to be ineffective in
controlling risky investment for Islamic banks. Conversely,
board independence for the
conventional banks together with risk disclosure index appears
as conservative instruments in
risk-taking. In addition, size and financial leverage play
significant roles in protecting Islamic
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banks from high, but none of them matter for Conventional banks.
Nevertheless, the SSB
appear as a significant parameter for the risk-taking for the
IBs. This result contradicts the
basic arguments of the paper since we argue that the IBs
Shari’ah Supervisory board restraint
IBs in taking excessive risks. This could be because of the weak
supervision ability or
ineffective supervisory board in IBs, which should be analysed
more detail based on the
survey reports.
_____________________
Insert Table 4 about here
_____________________
Results for Shareholders’ Value, Firm Performance and Corporate
Governance
We conduct panel data analysis to investigate the relationship
between shareholder
value and the corporate governance indicators on the 84 Islamic
and Conventional pair
sample over the 2006-2009 period. Three different models
(2.1-2.3) for both Islamic and
Conventional banks are presented in Table 5 (Panel A, B, and C).
All the models are fitted
with Pooled OLS method4. In Panel A, we find that board
structure variables (board size and
independence) are positively significant with ROA, which
indicate that these variables are the
key driving forces for the Islamic banking profitability.
Conversely, the coefficients of FDTI
and CGI indices are negatively significant with performance
variables, which indicate that
these indices destruct Islamic banks profitability. The similar
results are reported in the full-
sample (Panel C). However, risk-taking behaviour, religion and
financial leverage help
Islamic banks making short-term profits (ROA and ROE). On the
other hand, the risk
disclosure index (RDI) and FDTI play key roles in conventional
banks profit and value
destruction (Panel B). Nevertheless, financial leverage
positively influences conventional
banks profitability. Nevertheless, religion and SSB played a
leading role in profit making
-
18
mechanism for the full-sample (Panel C). These results indicate
that governance mechanisms
provide a weak explanation to changes in shareholders’ value
measured by Tobin’s Q for
Islamic banks.
However, Hutchinson and Gul (2004) and Gani and Jermias (2006)
view accounting-
based performance measures as better reflections of managerial
actions for the non-financial
firms, since they are under management control, but our results
contradict these studies. Our
results, however, support Yermack, (1996), Eisenberg et al,
(1998), Fuerst and Kang (2000),
Bahgat and Black, (2002), and El Mir and Seboul, (2008). The
findings also support the
similar arguments of Mishra et al. (2001) that smaller boards
make decisions more quickly
and play a controlling function, whereas large boards lack
genuine interaction and are less
likely to become involved in strategic decision-making (Judge
and Zeithaml, 1992 and
Lipton and Lorsh, 1992).
This result coincides with Chang and Leng (2004) and Rechner and
Dalton (1991) in
that the dual role of a CEO can have a positive effect on firm
performance. The results
coincide with Jackling and Johl (2009) and Hayes et al., (2004)
who find no association
between board activities, measured in terms of the frequency of
board meetings, and firm
performance. This result contradicts El Mir and Seboul (2008)
who find a significant positive
relationship between firm performance and auditor’s quality.
Larger firms are typically
associated with better firm performance, since they may benefit
from economies of scale.
This argument is not supported in our study. The
leverage-performance relationship result
indicates that there is a significant relationship with firm
performance. The results disagree
with Ebaid (2009) that finds capital structure has a weak-to-no
impact on firm performance
and agrees with Jackling and Johl (2009) who find a negative
significant relationship between
leverage and firm performance. Finally, neither the risk
disclosure index nor risk exposure is
significant.
-
19
_____________________
Insert Table 5 about here
_____________________
Robustness Checks for the Board Variables:
We may have problems of simultaneity, given the fact that board
size and board
independence might have been determined simultaneously with the
dependent variable. To
solve this econometric problem, we have implemented two-step
system GMM estimator5
with adjusted standard errors for potential heteroskedasticity
by Arellano and Bond (1998)
and xtabond2 instructions for Stata by Roodman (2006). This
method considers the
unobserved effect transforming the variables into first
differences and uses the generalized
method of moments to deal with endogeneity problems. We have
determined board size and
board independence as the instruments under the GMM system,
which are potentially
endogenous. The second-order autocorrelations and Hansen
J-statistics are insignificant for
all models. The number of instruments reduces for all the models
too. Furthermore, there is a
variation of the significance levels for the board size and
board independence while testing
against financial fragility or risk-taking variables, but the
directions of relationship are still
negative. Thus, the interpretations of the results from the GMM
are qualitatively same as
presented in Tables 4 & 5 and hence unreported.
Analysis of Survey Responses:
This section helps interpret the role of SSB in restraining IBs
from aggressive risk-taking and
hence, perform better and generate firm value during global
crisis. The average size of the
Shari’ah board is 3 and all members are male. The Shari’ah
boards consist of Shari’ah
-
20
scholars and economists, but no lawyers. Shari’ah board members
do not work for the bank
as employees. 55% of the respondents have said that they are
accountable to the Board, but
45% said, they are accountable to the shareholders. However, 91%
of the respondents have
agreed that the shareholders have the power to appoint and
dismiss the Shari’ah Board and
the Shari’ah board reports to the board of directors.
Despite the fact that all the respondents have agreed that banks
review the qualifications and
expertise of Shari’ah members, the responses are mixed when
asked about Shari’ah
members’ training and their understanding for the internal
control and risk management
process. All respondents, however, have agreed that the bank
never evaluated their
performance. However, 63% has said that they meet quarterly, and
34% said, they meet
monthly and they never experienced quorum problems. The
decisions are made based on
consensus. Moreover, 45% has said that the internal Shari’ah
officer, who are bank
employees, are responsible for Shari’ah board meeting, but 55%
said that the company
secretary is responsible for it. Interestingly, all Shari’ah
scholars serve the bank on a part-
time basis, and Shari’ah scholars sit in different boards but,
in some cases, the Central bank
permits one to sit in max 2 boards.
There are a few issues raised in this section regarding
disclosure and transparency. The
Shari’ah governance system is monitored either by national
Shari’ah council or Shari’ah
authority of the central bank. 82% of respondents have agreed
that the bank has an
independent Shari’ah board6. The internal Shari’ah review is
conducted by internal Shari’ah
committee (73%)7. Fourth, the Shari’ah resolutions are publicly
available (82%).
There are questions about role of Shari’ah board and Shari’ah
ruling, 55%of the respondents
believe that Shari’ah board plays an advisory role, and they
validate the documentation, but
45% of the respondents noted that the Shari’ah board plays a
supervisory role, and the board
-
21
members perform Shari’ah audit. However, 73% of the respondents
believe that the banks
consider Shari’ah board ruling as the binding but 27% thinks
that it is simply advisory.
Finally, the survey results cast doubt on the independent role
of Shari’ah board, which was
considered as the key driving force for the IBs governance
system in restraining IBs in
excessive risk-taking and hence, perform better during crisis.
The results fail to reject H3-H4,
which help identify SSB as the weak parameter in IBs governance
system. In addition, the
regression results identify corporate governance index (CGI) and
financial disclosure and
transparency index (FDTI) as the major variables for risk taking
in IBs, but board structure of
the IBs has profit motive. In our opinion, the monitoring
ability of the Shari’ah board is
minimum. The SSB performs Shari’ah audits and validate the
products and services. The
Shari’ah board members, however, perform the advisory role, and
they work as an additional
checkpoint, which adds some value to the bank, but Shari’ah
board cannot play any
supervisory role.
CONCLUSION
The purpose of this study is to test whether a multi-layer
corporate governance model,
like that instituted by the Islamic banking system, and the
supposed adherence to ethical
behavior, which is theoretically the cornerstone of Islamic
banking, offer protection against
the fallibility to financial crisis. We analyze data for 84
banks (59 Islamic banks and 25
Conventional Banks) from Bangladesh, Bahrain, Malaysia,
Pakistan, Saudi Arabia, the
United Arab Emirates, and the United Kingdom over the 2006-2009
periods.
The results indicate that the CGI and FDTI emerged as the key
driving force for risk
taking for Islamic banks, but board structure of the Islamic
banks are driven by short-term
profitability. However, governance mechanisms provide a weak
explanation for the changes
in shareholders’ value measured by Tobin’s Q for Islamic banks.
The results fail to reject the
hypothesis that the governance mechanism for the Islamic Banks
is the effectual authority in
-
22
protecting against fallibility during the global financial
crisis. Our findings cast doubt on the
independence of Shari’ah Boards. As Shari’ah Board members hold
multiple positions, it raises
further concern about their ability to diligently discharge the
roles expected of them. In
addition, Shari’ah board member tend not to undertake a
monitoring role, limiting their role to
giving opinions on Shari’ah compliance of the products and
services offered by IBs.
We make several contributions in this paper. We create a unique
database by hand
collection to study the issues in hand, and as such provide
better hypothesis testing with
appropriate data. Moreover, the corporate governance research on
Islamic banking is
underexplored due to absence of readily available commercial
database. Examination of the
global crisis adds a new dimension to this area. Second, we
construct several corporate
governance indices for this study, which are unique in their own
right, and employ such
indices on the same sample of countries for which no such
corporate governance indices
exist. These indices capture a wide range of governance
parameters, which are new and
unique in the corporate governance literature in baking and
specifically Islamic banking.
Third, we have conducted questionnaire survey of Shari’ah Board
members, thus adding a new
dimension to the field by analyzing a panel data for the both
IBs and conventional banks
simultaneously. Finally, we compare the Islamic banks with the
conventional banks using a
matched pair. To our knowledge, there is no other study that
conducts a matched-pair sample
study as we do.
The findings of this research will be a valuable source of
knowledge for policy
makers and regulators, particularly in the financial services
sectors, in devising strategies to
deal with future financial crises. This research contributes to
the literature regarding whether
a multi-layer corporate governance model, like that of the
Islamic banking system, based on
moral values rather than greed and fear, can be accepted as an
effective governance
mechanism in minimizing future financial crises.
-
23
ENDNOTES
1. Scholars pronounce the view that Islamic Banks were not
exposed for several reasons: first, Islamic Banks strictly comply
with Basel II and follow the guidelines of the Islamic
Financial Services Board (IFSB). Second, Islamic Banks build up
a profit equalization
reserve, which is used to finance pay-outs during difficult
years. Third, Islamic Banks
were neither exposed to toxic securities nor offered products
like CDOs or MBS, due to
Shari’ah prohibition (Ahmed, 2009). Nevertheless, derivative
products like CDS are
prohibited under Islamic law due to the existence of risky or
hazardous sale.
2. Shari’ah Board is considered as the ‘Supra Authority’ in
Islamic banking (Choudhury and Hoque, 2006). Together with the
regular board of directors and routine executive and
other operational committees, the institution of a Sharia Board
turns their governance
into what we call ‘multi-layer’ governance. The multi-layer
governance mechanism was
in place from the very inception of the Islamic Banking, even
before Cadbury Report
(1981). While their conventional peers (CBs) are likely to have
a governance structure
that features a board of governance and routine executive and
board committees. We call
this as ‘single-layer’ governance.
3. We used the SSB dummy in models 1 &2 and analyzed the
survey responses to test hypothesis 4.
4. Table A1 presents the multicollinearity criterion and the
test results for the variables in this study. Our models pass the
multicollinearity criterion; therefore, the panel data models
are free from collinearity bias.
5. Andres and Vallelado (2008), Pathan (2009), and Pathan and
Skully (2010) also solved the
econometric problem in their papers applying GMM system
estimator.
6. But the others tackle the matter with the help of Shari’ah
advisory firm or the internal
Shari’ah officer.
7. 27% thinks the internal Shari’ah review is the part of the
internal audit committee’s job.
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Table 1: Description of the Variables
This table presents the description of the corporate governance
and other firm and country specific variables applied in the study.
The description includes the calculation procedure for each
variable.
Corporate Governance Indices
Name Abbreviation Calculation Procedure Board
Structure
Index
bsi The Board Structure Index (bsi) is constructed based on
sixteen boardroom elements, e.g., strong
board, board competence, CEO power, CEO competence, board
committees etc. Each of the
sixteen characteristics of the Board Structure Index (BSI) gains
1 point; therefore, the index range
between 1.00 - 0.00. The BSI constitutes the following
characteristics: (a) board Size: Is the board
size of this bank larger than the median board size of the
sample? If yes then 1, otherwise 0, (b)
Board Independence: Does the firm have half or more independent?
If yes then 1, otherwise 0, (c)
Board Meeting: Did the firm conduct more meetings than the
median number of meeting of the
sample banks? If yes then 1, otherwise 0, (d) Board Attendance:
Did the members attend more
than 75% of meetings? If yes then 1, otherwise 0, (e) Board
Committees: If the firm has more
than the median number of board committees then 1, otherwise 0,
(f) Chair/CEO split: Are the
roles of Chair/CEO split? If yes then 1, otherwise 0 (Chair/CEO
duality), (g) Chair Independence:
Is the Chairperson independent? If independent then 1, otherwise
0, (h) CEO qualification: MA or
higher =1, less = 0, (i) CEO banking experience: If CEO has more
than the median years of
experience in the sample then 1, otherwise 0, (j) CEO Tenure: If
the CEO has more than the
median tenure in the sample=1, otherwise=0, (k) Chair executive
or non-executive; if non-
executive =1, otherwise=0, (l) Is SMT listed? Yes=1, no=0, (m)
If the non-executive members in
Senior Management Team (SMT) are more than half of the SMT =1,
otherwise =0, (n) Separation
Theorem: Is the CEO a member of the SMT? No=1, yes=0, (o) No. of
non-executive directors. If
more than half of the board size=1, otherwise=0, (p) Affiliated
Directors. If less than half of the
board size=1, otherwise =0. Source: Hand Collected
Financial
Disclosure
and
Transparency
Index
fdti The Financial Disclosure and Transparency Index (FDTI) is
constructed based on eleven
committee variables. The committees are audit committee,
Shari’ah committee, and risk
committee. The major elements of these committees are included
in the index. Each of the eleven
characteristics of the FDTI gains 1 point; therefore, the index
range between 1.00 - 0.00. The
definitions of the FDTI are described below: (a) Audit Firm: Has
the bank appointed a BIG 4
audit firm? Yes=1, no=0, (b) Audit Committee: Has the bank
formed an audit committee? Yes=1,
no=0, (c) Audit Committee: At least 3 members on the
committee=1, otherwise=0, (d) Audit
Committee: How many meeting in the year? 4 or more=1,
otherwise=0, (e) Shari’ah Committee:
Has the bank formed a Shari’ah committee? Yes=1, no=0, (f)
Shari’ah Committee: At least 3
members on the committee=1, otherwise=0, (g) Shari’ah Committee:
How many meetings? 4
meetings or more=1, otherwise=0, (h) Risk Committee: Has the
bank formed a risk committee?
Yes=1, no=0, (i) Risk Committee: At least 3 members on the
committee=1, otherwise=0, (j) Risk
Committee: How many meetings? 4 meetings or more=1, otherwise=0,
(k) Risk management
actions the bank normally takes or has been taken last year.
Yes=1, no=0. Source: Hand
Collected.
Risk
Disclosure
Index
rdi The Risk Disclosure Index (RDI) is constructed based on the
disclosure of five risk factors, e.g.,
credit risk, liquidity risk, fund management risk, market risk,
and operational risk. Each of the
five risk factors gains 1 point; therefore, the index range
between 1.00 - 0.00. The definitions of
the RDI are described below: (a) Did the bank disclose Credit
risk (Yes/No)? yes=1, no=0, (b)
Did the bank disclose Liquidity risk (Yes/No)? yes=1, no=0, (c)
Did the bank disclose Fund
management (Yes/No)? yes=1, no=0, (d) Did the bank disclose
Market risk (Yes/No)? yes=1,
no=0, (e) Did the bank disclose Operational risk (Yes/No)?
yes=1, no=0. Source: Hand Collected.
Corporate
Governance
Index
cgi This index comprises all the thirty-two corporate governance
characteristics of BSI, FDTI, and
RDI.
Strong Board and CEO Power Variables
Board Size board Number of the members in the board. Source:
Hand Collected.
Independent
Director
indep Proportion of independent non-executive directors in the
board. Source: Hand Collected
CEO duality ceo_chair If the CEO and Chairperson is the same
person, we give 1 otherwise 0. Source: Hand Collected
Internally
Recruited
CEO
ceo_exe If the CEO is internally recruited then 1, otherwise 0.
Source: Hand Collection.
Firm Specific Variables
Asset Size size Log of Total Assets
Tier 1
Capital
tier1 Tier 1 Capital
Leverage leverage Customers’ Term Deposit/Equity
Big 4 Audit
Firm
big4 If the banks appoints one of the big 4 audit firms as the
auditor then 1, otherwise 0. Source: Hand
collection
Shari’ah
Supervisory
Board
ssb SSB is the dummy variable for the IBs in the full
sample.
Country Specific Variables
Log_GDP log_gdp Log of GDP for the country. Source: World
Bank
Religion religion Religion is a dummy variable. If Islam is the
primary religion of the county then 1, otherwise 0.
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29
Table 2: Descriptive Statistics
This table presents the descriptive statistics for the variables
used in the paper for the period 2006-2009. Tobin’s
Q is the firm value parameter. roa and roe are the firm
performance proxies. bsi is the board structure index. fdti
is the financial disclosure and transparency index and rdi is
the risk-disclosure index. cgi is the corporate
governance index. board is the board size. indep is the ratio of
independent board members. ceo_chair is the
dummy variable for CEO-chair role duality. ceo_exe is the dummy
for internally recruited CEO. big4 is the
dummy for big four audit firms. tier1 is the regulatory capital.
size the asset size of the bank. leverage is the leverage ratio of
the bank. religion is the dummy for the major religion of the
country. log-gdp is the log of
country GDP. ssb is the dummy for IBs Shari’ah Board.
PANEL A: Islamic Bank Sample PANEL B: Conventional Bank Sample
Pair-wise
T-Test Variables Observations
Mean Std.
Dev.
Min Max Observatio
ns
Mean Std.
Dev.
Min Max
Tobin’s Q 173 0.19 0.23 0.00 0.92 98 0.00 0.00 0.00 0.00
8.36***
roa 214 0.05 0.06 -0.01 0.34 98 0.01 0.03 -0.11 0.10 6.86***
roe 214 0.34 0.37 -0.24 1.92 95 0.15 0.21 -0.65 0.52 4.56***
bsi 214 0.29 0.14 0.13 0.69 100 0.32 0.23 0.00 0.77 -1.55
fdti 214 0.31 0.28 0.00 1.00 100 0.38 0.33 0.00 1.00 -1.90*
rdi 214 0.49 0.36 0.00 1.00 100 0.64 0.36 0.00 1.00 -3.53***
cgi 214 0.33 0.17 0.06 0.75 100 0.40 0.26 0.00 0.86
-2.9289**
risk 201 0.27 0.33 0.00 1.69 100 0.03 0.07 0.00 0.39
7.3608***
size 214 14.56 1.89 9.49 21.13 98 14.89 1.61 11.81 17.72
1.51
tier1 200 1.64 1.75 -0.31 10.00 100 0.18 0.12 0.00 0.65
-20.07***
leverage 211 5.70 5.77 -4.44 27.94 84.00 5.29 3.70 0.01 19.47
0.61
board 210 9.10 2.39 0.00 18.00 95.00 9.19 2.36 5.00 19.00
-0.29
indep 198 0.44 0.28 0.00 0.89 97.00 0.23 0.29 0.00 0.83
6.14***
ceo_chair 209 0.04 0.19 0.00 1.00 93.00 0.02 0.15 0.00 1.00
0.75
ceo_exe 205 0.18 0.38 0.00 1.00 97.00 0.03 0.17 0.00 1.00
3.56***
big4 209 0.78 0.41 0.00 1.00 95.00 0.86 0.35 0.00 1.00 -1.62
log_gdp 214 24.93 1.36 23.09 28.23 100.00 25.18 1.35 23.16 28.23
-
religion 214 0.95 0.22 0.00 1.00 100.00 0.92 0.27 0.00 1.00
-
ssb
214 1.00 0.00 1.00 1.00 100.00 0.00 0.00 0.00 0.00 -
-
30
TABLE 3: Correlation Analysis
This table presents the correlation coefficients for the two
panels (Islamic and Conventional) over the period
2006-2009. Tobin’s Q is the firm value parameter. roa and roe
are the firm performance proxies. bsi is the board
structure index. fdti is the financial disclosure and
transparency index and rdi is the risk-disclosure index. cgi is
the corporate governance index. board is the board size. indep
is the ratio of independent board members.
ceo_chair is the dummy variable for CEO-chair role duality.
ceo_exe is the dummy for internally recruited
CEO. big4 is the dummy for big four audit firms. tier1 is the
regulatory capital. size the asset size of the bank. leverage is
the leverage ratio of the bank. religion is the dummy for the major
religion of the country. log-gdp is
the log of country GDP.
PANEL A: Islamic Sample Tobin’
s Q
roa roe bsi fdti rdi cgi board indep ceo_
chair
ceo-
exe
big4 risk size tier1 leverage religion log-gdp
Tobin’s
Q
1.00
roa 0.14 1.0
0
roe 0.38 0.69
1.00
bsi 0.10 0.1
6
-
0.15
1.0
0
fdti 0.17 0.15
0.10
0.57
1.00
rdi -0.20 -
0.15
-
0.27
0.2
0
0.33 1.00
cgi 0.06 -
0.05
-
0.12
0.8
0
0.87 0.60 1.00
board -0.05 0.1
3
0.1
1
-
0.20
-
0.05
0.11 -
0.07
1.00
indep 0.05 -
0.02
0.0
9
0.1
2
-
0.03
-
0.17
-
0.02
-0.16 1.00
ceo_chai
r
-0.07 -
0.11
-
0.09
-
0.09
0.06 0.16 0.04 0.03 -0.02 1.00
ceo_exe -0.15 -
0.21
-
0.19
-
0.06
-
0.15
0.10 -
0.06
0.01 -0.12 0.07 1.00
big4 -0.02 -
0.02
0.0
4
-
0.15
0.06 -
0.02
-
0.04
0.02 0.02 0.09 0.20 1.00
risk -0.08 0.1
0
-
0.12
0.2
0
0.16 -
0.04
0.15 0.17 -0.02 -
0.02
-
0.06
0.06 1.00
size 0.03 -
0.24
-
0.06
0.0
1
0.03 -
0.10
-
0.02
-0.08 0.09 0.12 -
0.06
0.00 -
0.41
1.00
tier1 0.05 0.30
0.25
-0.1
3
-0.02
-0.19
-0.13
0.09 0.06 -0.03
-0.10
-0.06
0.12 0.37 1.00
leverage 0.32 0.12
0.57
0.03
-0.15
-0.08
-0.09
-0.02 -0.24 0.00 -0.16
-0.13
-0.36
0.15 -0.04
1.00
religion 0.03 0.1
3
0.2
0
-
0.27
-
0.20
-
0.13
-
0.26
-0.15 0.08 0.04 0.09 -
0.07
-
0.64
0.41 0.23 0.24 1.00
-
31
log-gdp 0.39 0.2
2
0.2
1
0.4
6
0.55 -
0.27
0.38 0.02 0.10 0.01 -
0.22
0.01 0.44 0.05 0.14 -0.11 -0.44 1.00
PANEL B: Conventional Sample
Tobin’
s Q
roa roe bsi fdti rdi cgi board indep ceo_ chair ceo-
exe
big4 risk size tier1 leverage religion
Tobin’s
Q
1.00
roa -0.19 1.00
roe 0.06 0.8
1
1.0
0
bsi -0.01 0.0
8
0.0
8
1.0
0
fdti -0.13 0.2
0
0.0
6
0.7
9
1.00
rdi 0.13 -0.2
4
-0.2
2
0.65
0.61 1.00
cgi -0.03 0.06
0.00
0.93
0.93 0.80 1.00
board -0.18 0.2
2
0.2
0
0.0
6
0.17 -
0.01
0.10 1.00
indep 0.22 -
0.3
8
-
0.3
1
-
0.1
8
-
0.07
0.17 -
0.06
-0.19 1.00
ceo_chai
r
-0.08 0.0
1
0.1
0
0.2
2
0.21 0.05 0.20 -0.11 -0.09 1.00
ceo_exe -0.32 -
0.1
1
-
0.1
6
-
0.0
5
0.02 -
0.09
-
0.04
0.16 0.11 0.05 1.00
big4 -0.12 0.0
0
0.0
0
0.1
5
0.12 -
0.02
0.11 0.26 -0.23 -0.05 0.15 1.00
risk -0.57 0.27
-0.0
1
-0.0
1
0.17 0.00 0.07 0.24 -0.09 0.13 0.31 -0.21
1.00
size -0.13 -0.4
6
-0.5
0
-0.0
8
-0.19
0.14 -0.08
-0.31 0.17 -0.06 -0.20
-0.15
-0.02
1.00
tier1 0.37 0.26
0.59
0.18
0.16 -0.06
0.13 0.20 -0.13 0.18 -0.19
0.11 -0.39
-0.62
1.00
leverage -0.08 0.6
9
0.5
7
0.1
7
0.31 0.01 0.21 0.42 -0.23 0.04 0.11 0.10 0.35 -
0.70
0.39 1.00
religion 0.27 -
0.5
0
-
0.3
2
-
0.2
4
-
0.36
-
0.06
-
0.27
-0.20 0.10 -0.03 -
0.23
0.05 -
0.66
0.48 -0.06 -0.74 1.00
-
32
Table 4: Corporate Governance and Risk-Taking of Islamic
Banks
This table presents the regression results for corporate
governance and risk-taking models. Each panel presents
three models (model 1 contents the corporate governance indices
(bsi, fdti, rdi), model 2 contents the corporate governance index
(cgi), and model 3 contents the strong board (board and
independence) and CEO power (ceo-
chair and ceo-exe) variables. bsi is the board structure index.
fdti is the financial disclosure and transparency
index and rdi is the risk-disclosure index. cgi is the corporate
governance index. Board is the board size. Indep is
the ratio of independent board members. ceo_chair is the dummy
variable for CEO-chair role duality. ceo-exe is
the dummy for internally recruited CEO. big4 is the dummy for
big four audit firms. tier1 is the regulatory
capital. size the asset size of the bank. leverage is the
leverage ratio of the bank. religion is the dummy for the
major religion of the country. log-gdp is the log of country
GDP. ssb is the dummy for IBs Shari’ah Board. ***,
**, * indicate the significance level at 1%, 5%, and 10%
levels.
-
33
PANEL A: ISLAMIC
BANKS
PANEL B: NON-ISLAMIC
BANKS
PANEL C: FULL SAMPLE
MODEL 1.1
MODEL 1.2
MODEL 1.3
MODEL 1.1
MODEL 1.2
MODEL 1.3
MODEL 1.1
MODEL 1.2
MODEL 1.3
bsi .10
(0.57)
.06
(0.88)
.00
(0.03)
fdti .20**
(2.03)
.05
(1.15)
.18**
(2.47)
rdi .03
(0.51)
-.05*
(-1.69)
-.01
(-0.11)
cgi .39***
(2.70)
.05
(1.50)
.22***
(2.76)
board .02
(1.60)
.01**
(2.14)
.02**
(2.29)
indep -.03
(-0.32)
-.06**
(-2.18)
-.05
(-0.84)
ceo_chair .03
(0.26)
.02
(0.25)
ceo_exe -.08
(-1.22)
.04
(0.55)
-.08
(-1.61)
big4 .047
(0.73)
.05**
(2.10)
.047
(1.02)
tier1 .022
(1.58)
.023
(1.64)
.00
(-0.19)
.00
(-0.55)
.00
(-0.80)
.00
(0.50)
.00
(-0.82)
.00
(-0.87)
.00
(-1.08)
size -.05***
(-3.88)
-.05***
(-4.06)
-.04***
(-3.17)
-.01**
(-2.03)
-.01*
(-1.87)
-.02***
(-3.05)
-.04***
(-4.28)
-.04***
(-4.29)
-.04***
(-3.86)
leverage -.01**
(-2.29)
-.01**
(-2.24)
-.01**
(-2.53)
.00
(-1.04)
.00
(-0.90)
.00
(-0.44)
-.01***
(-3.43)
-.01***
(-3.40)
-.01***
(-3.68)
religion -.17
(-1.22)
-.15
(-1.07)
-.10
(-0.72)
.05
(1.10)
.05
(1.12)
.00
(0.09)
-.08
(-0.84)
-.05
(-0.54)
-.06
(-0.60)
log_gdp -.02
(-0.72)
-.01
(-0.58)
.02
(0.85)
.01
(0.58)
.01
(0.53)
-.01
(-1.11)
.00
(-0.21)
.00
(0.13)
.01
(0.57)
ssb .28***
(4.61)
.28***
(4.65)
.27***
(4.16)
constant 1.3**
(2.04)
1.2*
(1.93)
.24
(0.35)
.00
(0.01)
.00
(-0.01)
.49
(1.37)
.56
(1.16)
.38
(0.82)
.07
(0.14)
-
34
Table 5 Corporate Governance and Firm Performance of Islamic
Banks
This table presents the regression results for corporate
governance and firm performance models. The table
contents three panel for Islamic Banks, Conventional Banks and
Full sample. Each panel presents nine models
combining the performance and firm value. roa is the return on
assets. roe is the return on equity. Tobin’s Q is the
firm value. bsi is the board structure index. fdti is the
financial disclosure and transparency index and rdi is the
risk-
disclosure index. cgi is the corporate governance index. board
is the board size. indep is the ratio of independent
board members. ceo_chair is the dummy variable for CEO-chair
role duality. ceo-exe is the dummy for internally
recruited CEO. big4 is the dummy for big four audit firms. tier1
is the regulatory capital. size the asset size of the
bank. leverage is the leverage ratio of the bank. risk is the
risk-taking variable. religion is the dummy for the major
religion of the country. log-gdp is the log of country GDP. ssb
is the dummy for shari’ah supervisory board of
Islamic banks. ***, **, * indicate the significance level at 1%,
5%, and 10% levels.
Pooled Observations
214 214 214 100 100 100 314 314 314
Adj. R square 0.17 0.18 0.16 0.13 0.11 0.21 0.27 0.27 0.28
F-stat 3.95*** 4.65*** 3.01*** 2.14** 2.10** 2.63*** 8.24***
9.39*** 6.67***
-
35
PANEL A: ISLAMIC BANKS
Firm Performance Proxy: ROA Firm Performance Proxy: ROE Firm
Value Proxy: Tobin’s Q Model 2.1 Model 2.2 Model 2.3 Model 2.1
Model 2.2 Model
2.3
Model 2.1 Model 2.2 Model 2.3
bsi .018
(0.56)
-.16
(-0.79)
-.19
(-0.81)
fdti -.06***
(-3.19)
-.39***
(-3.40)
-.08
(-0.40)
rdi .01
(1.17)
.06
(0.76)
.04
(0.44)
cgi -.05*
(-1.77)
-.56***
(-3.27)
-.13
(-0.73)
board .00*
(1.85)
.02
(1.53)
.00
(-0.23)
indep .04***
(2.94)
.10
(0.92)
-.10
(-0.93)
ceo_chair -.00
(-0.01)
-.06
(-0.41)
-.05
(-0.36)
ceo_exe -.01
(-0.83)
-.03
(-0.32)
0
(-0.06)
big4 -.02
(-1.56)
.00
(0.05)
.07
(0.81)
tier1 .00
(-0.93)
.00
(-1.09)
.00
(-0.78)
-.01
(-0.57)
-.01
(-0.71)
-.01
(-0.48)
.00
(0.21)
.01
(0.37)
.01
(0.46)
size 0*
(-1.73)
0
(-1.37)
0
(-0.85)
.01
(0.79)
.02
(1.07)
.02
(0.90)
-.04*
(-1.76)
-.04*
(-1.81)
-.04
(-1.60)
leverage 0***
(-2.67)
0***
(-2.92)
0***
(-2.97)
.02***
(4.14)
.02***
(3.91)
.02***
(3.48)
.01**
(2.46)
.01**
(2.52)
.01**
(2.59)
risk .03**
(1.97)
.02*
(1.79)
.03**
(2.06)
.08
(0.86)
.07
(0.74)
.00
(-0.00)
-.24
(-1.22)
-.26
(-1.37)
-.26
(-1.21)
religion .08***
(3.25)
.06***
(2.66)
.06**
(2.42)
.27
(1.63)
.19
(1.17)
.2
(1.13)
.27
(1.20)
.22
(1.05)
.24
(1.05)
Log_gdp .01***
(2.66)
.01**
(2.06)
.00
(0.80)
.05**
(2.06)
.04
(1.55)
.01
(0.53)
.12***
(3.85)
.11***
(4.89)
.11***
(4.51)
constant -.2*
(-1.74)
-.12
(-1.12)
-.03
(-0.26)
-1.31*
(-1.79)
-.90
(-1.20)
-.41
(-0.47)
-2.60***
(-2.88)
-2.2***
(-3.52)
-2.25***
(-3.19)
Pooled
Observation
s
214 214 214 214 214 214 173 173 173
Adj. R
square
0.12 0.09 0.14 0.14 0.13 0.09 0.28 0.3 0.21
F-stat 2.82*** 2.59*** 2.64*** 3.26*** 3.29*** 2.03** 2.87***
3.43*** 2.06**
PANEL B: CONVENTIONAL BANKS
Firm Performance Proxy: ROA Firm Performance Proxy: ROE Firm
Value Proxy: Tobin’s Q
Model
2.1
Model 2.2 Model 2.3 Model 2.1 Model 2.2 Model
2.3
Model 2.1 Model 2.2 Model
2.3
bsi
.03
(1.56)
.31**
(2.04)
.00
(-0.45)
fdti
.02
(1.33)
-.14
(-1.36)
.00**
(-2.19)
rdi
-.04***
(-4.30)
-.14*
(-1.96)
0***
(2.77)
cgi .00
(-0.04)
-.09
(-1.09)
.00
(-1.16)
board .00
(0.04)
-.01
(-0.71)
.00
(-1.43)
indep -.02
(-1.51)
-.14*
(-1.90)
.00
(0.91)
ceo_exe .00
(0.17)
-.08
(-0.43)
.00
(-1.32)
big4 -.03**
(-2.60)
-.05
(-0.81)
.00
(0.11)
tier1 .00 .00 .00 .00 .00 .00 .00 .00 .00
-
36
(0.16) (-0.23) (-1.04) (0.57) (0.67) (0.27) (0.22) (0.62)
(0.20)
size
.00
(-0.17)
.00
(0.32)
.00
(0.19)
.00
(0.21)
.00
(0.12)
.01
(0.26)
.00
(-1.09)
.00
(-1.60)
.00
(-0.28)
leverage
0***
(-3.04)
0**
(-2.37)
0***
(-2.95)
.03***
(2.98)
.03***
(3.36)
.03***
(2.83)
0***
(4.35)
0***
(3.94)
0***
(4..25)
risk
-.07*
(-1.87)
-.03
(-0.79)
-.03
(-0.69)
-.26
(-0.96)
-.15
(-0.55)
-.23
(-0.66)
.00
(-1.04)
.00*
(-1.73)
.00
(-0.54)
religion
.08***
(5.38)
.08***
(4.76)
.07***
(3.73)
.36***
(3.36)
.32***
(2.96)
.32**
(2.56)
.00
(-0.73)
.00
(-0.74)
.00
(-0.25)
log_gdp
.00
(1.26)
.00
(0.93)
.00
(0.55)
.01
(0.39)
.00
(-0.03)
.01
(0.27)
.00
(-0.51)
.00
(-0.49)
.00
(0.49)
constant -.15
(-1.24)
-.14
(-1.11)
-.06
(-0.42)
-.56
(-0.67)
-.27
(-0.31)
-.36
(-0.37)
0
(0.63)
0
(0.77)
0
(-0.28)
Pooled
observations
100 100 100 100 100 100 98 98 98
Adj. R
square
0.47 0.34 0.43 0.43 0.4 0.46 0.43 0.36 0.39
F-stat 7.06*** 5.31*** 5.15*** 6.12*** 6.27*** 5.54*** 6.14 5.69
4.52***
PANLE C: FULL SAMPLE
Firm Performance Proxy: ROA Firm Performance Proxy: ROE Firm
Value Proxy: Tobin’s Q
Model 2.1 Model 2.2 Model 2.3 Model 2.1 Model 2.2 Model
2.3
Model 2.1 Model 2.2 Model
2.3
bsi .0236
(1.11)
.0706
(0.50)
-.0175
(-0.18)
fdti -.03**
(-2.26)
-.30***
(-3.39)
.08
(1.09)
rdi .00
(0.26)
.04
(0.63)
-.04
(-0.98)
cgi -.02
(-1.19)
-.28***
(-2.81)
.02
(0.45)
board .00
(1.83)
.00
(1.25)
.00
(-0.48)
indep .02**
(2.23)
.02
(0.20)
-.02
(-0.51)
ceo_chair .00
(-0.16)
-.09
(-0.68)
-.09
(-1.05)
ceo_exe -.01
(-1.08)
-.02
(-0.34)
-.03
(-0.74)
big4 -.012**
(-2.35)
-.03
(-0.48)
.04
(1.05)
tier1 .00
(-0.47)
.00
(-0.47)
.00
(-0.62)
.00
(-0.88)
.00
(-0.78)
.00
(-0.42)
.00
(0.94)
.00
(0.72)
.00
(0.81)
size -.02
(-1.05)
-.02
(-1.07)
0
(-0.61)
.01
(1.15)
.01
(1.11)
.01
(0.79)
.01
(1.12)
.01
(1.47)
.01
(1.14)
leverage 0***
(-4.30)
0***
(-4.35)
0***
(-3.90)
.02***
(5.17)
.02***
(5.00)
.02***
(4.87)
.01***
(2.96)
.01***
(2.94)
.01***
(2.17)
risk .02**
(2.16)
.02**
(1.99)
.03**
(2.56)
.06
(0.82)
.04
(0.57)
.00
(0.06)
-.05
(-0.58)
-.04
(-0.44)
-.05
(-0.49)
religion .08***
(4.28)
.07***
(3.96)
.06***
(3.53)
.30**
(2.57)
.24**
(2.08)
.23
(1.86)
.11
(1.49)
.13*
(1.80)
.15*
(1.80)
log_gdp .01*
(1.92)
.00
(1.56)
.00
(0.67)
.03
(1.62)
.02
(1.10)
.02
(0.75)
.05***
(4.00)
.05***
(4.73)
.05***
(4.27)
ssb .03***
(2.90)
.03***
(2.90)
.02**
(2.01)
.05
(0.68)
.06
(0.72)
.11
(1.26)
.22***
(4.52)
.2***
(4.36)
.22***
(4.00)
constant -.14
(-1.62)
-.10
(-1.21)
-.03
(-0.36)
-.90
(-1.55)
-.55
(-0.97)
-.39
(-0.57)
-1.5****
(-4-05)
-1.69***
(-4.98)
-1.68***
(-4.43)
Pooled
Observatio
ns
314 314 314 314 314 314 271 271 271
Adj. R
square
0.23 0.22 0.27 0.20
0.19 0.19 0.40 0.40 0.37
F-stat 6.38*** 7.01*** 6.03*** 5.58*** 5.85*** 4.21*** 7.97***
9.20*** 5.86***