Bank Failure prediction: corporate governance and financial indicators
Journal article
Authors | Alzayed, N., Eskandari, R. and Yazdifar, H. |
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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. |
Keywords | Corporate governance; CAMEL ratios; bank failure; failure prediction |
Year | 2023 |
Journal | Review of Quantitative Finance and Accounting |
Publisher | Springer |
ISSN | 1573-7179 |
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 status | Published |
Publication dates | |
Online | 22 May 2023 |
Publication process dates | |
Accepted | 10 Apr 2023 |
Deposited | 05 Jun 2023 |
https://repository.derby.ac.uk/item/9y0qq/bank-failure-prediction-corporate-governance-and-financial-indicators
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Accepted author manuscript
CG CAMEL failure Prediction - Accepted March 2023.pdf | ||
File access level: Open |
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