Bank Failure prediction: corporate governance and financial indicators

Journal article


Alzayed, N., Eskandari, R. and Yazdifar, H. 2023. Bank Failure prediction: corporate governance and financial indicators. Review of Quantitative Finance and Accounting. https://doi.org/10.1007/s11156-023-01158-z
AuthorsAlzayed, N., Eskandari, R. and Yazdifar, H.
Abstract

Most failure prediction studies have relied on using financial ratios as predictors. The most suitable financial predictors for banks are financial ratios following the CAMEL rating system. Also, corporate governance has been proven to be an important aspect of banks, especially after the financial crisis. Given its importance, we test the ability of corporate governance to enhance the prediction of bank failure. While there are only few studies that examine efficiency of corporate governance as a failure predictor, there are scarcely any studies that examine it as predictor of US banks failure. Using discriminant analysis, we predict the failure of banks insured by the Federal Deposit Insurance Corporation during the period from 2010 to 2018 using financial and non-financial predictors. We find that combining CAMEL ratios with corporate governance variables not only enhances the accuracy of prediction but also extends the time horizon of prediction to three years before failure. We also show that the earnings of banks are more significant in predicting bank failure than the capital structure and asset quality. The results further reveal that the CEO compensation, voting rights and institutional ownership are more significant predictors than the board characteristics. These results are robust when using logit regression.
This paper provides insight to banks, regulators and shareholders by showing that corporate governance and banks earnings are strong predictors of bank failure.

KeywordsCorporate governance; CAMEL ratios; bank failure; failure prediction
Year2023
JournalReview of Quantitative Finance and Accounting
PublisherSpringer
ISSN1573-7179
Digital Object Identifier (DOI)https://doi.org/10.1007/s11156-023-01158-z
Web address (URL)https://link.springer.com/article/10.1007/s11156-023-01158-z
Accepted author manuscript
File Access Level
Open
Output statusPublished
Publication dates
Online22 May 2023
Publication process dates
Accepted10 Apr 2023
Deposited05 Jun 2023
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https://repository.derby.ac.uk/item/9y0qq/bank-failure-prediction-corporate-governance-and-financial-indicators

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