Tarchouna 2021

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Do board characteristics and ownership structure matter for bank non-

performing loans? Empirical evidence from US commercial banks
Article in Journal of Management and Governance · February 2021

DOI: 10.1007/s10997-020-09558-2
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Journal of Management and Governance
https://doi.org/10.1007/s10997-020-09558-2
Do board characteristics and ownership structure matter

for bank non‑performing loans? Empirical evidence
from US commercial banks
Ameni Tarchouna1 · Bilel Jarraya2 · Abdelfettah Bouri3
Accepted: 22 December 2020

© The Author(s), under exclusive licence to Springer Science+Business Media, LLC part of Springer Nature 2021
Abstract
This paper aims to study the ability of the corporate governance of banks to reduce
non-performing loans. The dynamic panel GMM estimation is applied to 184 US
commercial banks over 2000–2013 period. Given that bank-size groups have differ-
ent risk profiles, the full sample of US banks is divided into three asset-size classes.
For every asset-size group of banks, we successively integrate five corporate govern-
ance variables in addition to the bank-specific and macroeconomic variables in sepa-
rate regressions. The central finding of this research is that small banks are charac-
terized by a weak and fragile corporate governance system which leads to a bad loan
quality. This result can be explained by small banks’ reliance on personal connec-
tions. Concerning medium banks, we notice a sound corporate governance system.
As far as large banks are concerned, it is to mention that the corporate governance
system of these banks is neutralized. On account of the high level of liquidity, large
banks are engaged in excessive lending practices without taking notice of the undue
losses. This paper notably contributes to the financial literature via empirically prov-
ing that the effect of banks’ corporate governance on their loan quality depends on
bank size.
Keywords Non-performing loans · Bank corporate governance · Board

characteristics · Ownership structure · Bank size · GMM dynamic panel data
estimator
* Ameni Tarchouna
ameni.tarchouna@hotmail.fr
1
Governance, Finance and Accounting Laboratory, Faculty of Economics and Management, Sfax
University, P.O. Box 1169, Sfax 3029, Tunisia
2
Department of Accounting, College of Business and Economics, Qassim University,
P.O. Box 6640, Buraidah 51452, Qassim, Saudi Arabia
3
Faculty of Economics and Management, Sfax University, P.O. Box 1169, Sfax 3029, Tunisia
13
Vol.:(0123456789)
A. Tarchouna et al.
1 Introduction
During the global financial crisis, US banks were characterized by an elevated

level of non-performing loans (Tarchouna et al. 2019b). These loans become non-
performing when borrowers fail to pay their debts back. Non-performing loans
may have serious impact on banks and may even be behind their failure (Jin et al.
2011; Lu and Whidbee 2016).
Given the importance of reducing non-performing loans to ensure the stabil-
ity of the financial system, many studies have tried to spot the factors behind
those bad loans. Those studies managed to come up with two types of factors,
namely bank-specific and macroeconomic determinants, that may affect non-per-
forming loans. (Salas and Saurina 2002; Quagliariello 2007; Louzis et al. 2012;
Nikolaidou and Vogiazas 2014; Ghosh 2015; Tarchouna et al. 2019b). Despite
their considerable researches, previous studies used bank-specific and/or mac-
roeconomic determinants to explain non-performing loans without taking into
account the effect of bank corporate governance (Louzis et al. 2012; Chaibi and
Ftiti 2015; Beck et al. 2015). The global financial crisis showed the importance
and the necessity to having more knowledge regarding the effectiveness of banks’
corporate governance than ever (Bhagat and Bolton 2019; Seijts et al. 2019;
Fernández Sánchez et al. 2020). Indeed, the weaknesses of banks’ corporate gov-
ernance contributed, at a large measure, to excessive risk-taking (Laeven 2013;
John et al. 2016; Tarchouna et al. 2017). Accordingly, studying the influence
of corporate governance on bank lending quality has become paramount. How-
ever, very few studies have examined this influence (Grove et al. 2011; Love and
Rachinsky 2015; O’Sullivan et al. 2015). Moreover, studies on bank corporate
governance were not accurate enough either when assuming the constancy of cor-
porate governance data, all along their studies, or when working on a short period
(Grove et al. 2011). A further case of limitation of some previous studies is that
the relation between bank corporate governance and its loan quality is still stud-
ied over a full sample of banks without taking into consideration the difference in
risk profile which depends on banks’ size. Wheelock and Wilson (1999), Kishan
and Opiela (2000), Koutsomanoli-Filippaki et al. (2012), Black and Hazelwood
(2013) and Cornett et al. (2013) highlighted the importance of treating each size
group separately.
This paper aims to study the ability of banks’ corporate governance to reduce
non-performing loans of US commercial banks over the 2000–2013 period. Given
that bank-size groups have different risk profiles, the full sample of US banks is
divided into three asset size classes. For every asset-size group of banks, we suc-
cessively integrate five corporate governance variables in addition to the bank-
specific and macroeconomic variables in separate regressions.
Aiming to fill the gaps of previous literature, our study provides a set of con-
tributions to the existing literature summarized as follows: First, our study nota-
bly contributes to non-performing loans literature via empirically proving the
effect of banks’ corporate governance on their loan quality. While this impact is
still implicitly studied, our research takes into account the influence of corporate
13
Do board characteristics and ownership structure matter for…
governance on non-performing loans along with the bank-specific and macroeco-

nomic determinants.
Second, the main contribution of our study to the existing corporate governance
literature lies in empirically proving that the effect of banks’ corporate governance
on their loan quality depends on bank size. Our research provides a comparative
analysis between three asset-size classes of US commercial banks. That is, compared
to previous studies, which use a full sample, we examine the influence of banks’ cor-
porate governance on non-performing loans for three subsamples. Indeed, the full
sample of our study is divided into three asset-size groups with regard to the differ-
ence in banks’ risk profile which is based on their size. This novelty enables us to
reveal the explanations of the gap of the effect of corporate governance variables on
loan quality between small, medium and large US banks. For more clarification, it is
to be noted that the risk profiles of banks depends on their size. In fact, large banks
tend to take excessive risks than smaller ones. Thus, the control and the evaluation
of bank clients become a harder mission leading to an increase in non-performing
loans’ level (Stern and Feldman 2004; Louzis et al. 2012; Chaibi and Ftiti 2015).
Stern and Feldman (2004) clarify this point by suggesting that large-sized banks
venture by having more risks given that creditors, relying on the intervention of gov-
ernment in case of bank’s failure, do not impose any market discipline. Therefore,
large banks grant credits even to bad borrowers resulting in more non-performing
loans (Tarchouna et al. 2019a). Some characteristics of large banks’ corporate gov-
ernance, namely board characteristics, ownership structure and CEO’s pay have par-
ticipated in exacerbating the crisis (Erkens et al. 2012; Fahlenbrach and Stulz 2011;
Beltratti and Stulz 2012; Tarchouna et al. 2017; Fabrizi 2018; Sun 2018). During the
crisis, the corporate governance of high-sized financial institutions was largely criti-
cized for being ineffective and unable to control and remain strong against excessive
risk-taking and lending practices, which, consequently, resulted in a critical situation
(Zagorchev and Gao 2015; Sheedy and Griffin 2018).
The remainder of this paper is structured as follows: Sect. 2 embarks upon litera-
ture review and hypotheses development. Section 3 presents the model specification.
Section 4 describes the dataset. Section 5 illustrates the variables definition. Sec-
tion 6 discusses empirical results and interpretations. Finally, Sect. 7 provides some
concluding remarks.
2 Literature review and hypotheses development
Corporate governance can be defined as a set of mechanisms that deal with agency
problems caused by the split between ownership and control. These mechanisms
ensure the good functioning of the direction and control of corporations (Jensen and
Meckling 1976; Shleifer and Vishny 1997).
As mentioned by Laeven (2013), banks’ corporate governance is different from
that of non-financial institutions. The distinctive characteristics of banks exac-
erbate governance problems and may lessen the efficiency of usual governance
mechanisms (Caprio and Levine 2002; Levine 2004; Laeven 2013). Under banking
13
A. Tarchouna et al.
opacity, managers may usually design packages of remuneration that permit them to
gain at the detriment of the long-run progress of their banks (John et al. 2016).
There is no consensus regarding the effect of corporate governance variables on
the banking sector in previous corporate governance literature. In fact, this effect
is expected to be either positive or negative, depending on bank type and period of
study.
In our study, we emphasize the impact of corporate governance mechanisms on
NPLs. So, we employ the commonly used variables of bank corporate governance
characteristics.
2.1 The effect of board size on non performing loans
O’Sullivan et al. (2015) find that board size affects the performance of bank hold-
ing companies positively. Their results indicate that superior size of bank board
enhances Tobin’s Q and reduces non-performing asset ratio, loan loss reserve ratio,
and net charge-off ratio in normal periods. Likewise, during the crisis period the
board size is negatively related to non-performing assets ratio, which reflects a better
monitoring. However, the relation between board size and performance changes in a
crisis framework, since the size of the board affects Tobin’s Q negatively. O’Sullivan
et al. (2015) explain this finding via the justifications presented by Lipton and
Lorsch (1992) and Jensen (1993) who argue that the enlargement of board size may
erupt difficulties by hindering the timely decision-making process.
Grove et al. (2011) show that the increase of board size enhances the financial
performance. However, if the board becomes excessively large, this enlargement
may weaken the bank performance. Concerning loan quality, these authors indicate
that larger board of directors does not control bank lending process efficiently and
hence, weakens loans quality.
H1 We expect that the board size affects banks’ non-performing loans.
In our point of view, the board size effects on banks’ non-performing loans will
be different between the three categories of bank size (small, medium, large). The
board of small banks is interested only in bank profit and takes an elevated level of
risk by lending borrowers with risky projects. In addition, the managers of these
banks do not make the decisions in the interests of bank shareholders because they
have more flexibility and so more possibility to be entrenched (Yermack 1996;
Eisenberg et al. 1998). So, the board of directors will not play his role properly to
control the managers of this type of banks and the board size will affect positively
the non-performing loans. However, the board of medium banks is more large and
diversified because there is a high number of members representative of the major-
ity shareholders on the board. This enlargement of the board size in medium banks
enhances supervision and reduces the discretionary power of managers (Huse 2005;
Zona and Zattoni 2007). So, the board of directors in this type of banks will be more
effective and will have a negative effect on non-performing loans.
13
Conversely, for large banks, when the board of directors reaches a certain level,
the increase of the board size can have a reverse effect as noted by Grove et al.
(2011). This study shows that the excessive size of the board of directors can not
control the bank lending process efficiently, weakening, therefore, the quality of
bank loans. In the same line of ideas, Jensen (1993) and Eisenberg et al. (1998)
argue that the control, performed by large boards, is inefficient due to communi-
cation and organization difficulties and inner conflicts among directors. Likewise,
De Andres and Vallelado (2008) also state that over-sized boards face many coordi-
nation problems in the banks’ decision-making processes. Indeed, for large banks,
the effect of board size will be either neutralized or positive on the non-perform-
ing loans. So, the principal hypothesis can be divided into three sub-hypotheses as
follows:
H1.1 We expect a positive relationship between board size and non-performing

loans of small banks.
H1.2 We expect a negative relationship between board size and non-performing

loans of medium banks.
H1.3 We expect a positive relationship between board size and non-performing

loans of large banks.
2.2 The effect of board independence on non performing loans
The independence of board directors is actually an important topic in governance.

In the previous corporate governance literature, there is no consensus relating to the
effect of board independence on firm performance, but the influence of board inde-
pendence on NPLs is still relatively ignored in past studies as suggested by Switzer
and Wang (2013). The board independence considered by Switzer and Wang (2013)
as an indicator of board capability to ensure an independent control and supervisory
role of management procedures is beneficial for corporate performance. So, NPLs
level can be reduced with more independent directors.
However, independent directors on the board don’t have a direct and accruate
control of the bank lending process. Many studies, like Renee Adams and Ferreira
(2007), Coles et al. (2008) and Harris and Raviv (2008), suggest that insiders ena-
ble the transmission of information between board and management. These studies
argue that the presence of insiders in the board of directors will be more beneficial
compared to independent directors. Based on this point of view, the augmentation of
the number of independent directors will have a positive effect on non-performing
loans and will be the same for the three categories of bank size (small, medium,
large). Therefore,
H2 We expect that the proportion of independent directors on the board affects

banks’ non-performing loans.
13
A. Tarchouna et al.
H2.1 We expect a positive relationship between the proportion of independent direc-

tors on the board and non-performing loans of small banks.

tors on the board and non-performing loans of medium banks.

tors on the board and non-performing loans of large banks.
2.3 The effect of CEO duality on non performing loans
As suggested by Switzer and Wang (2013), the separation of the dual leadership
roles can reflect the ability of the board to provide an independent control and to
enhance the corporate performance.
In their study on U.S financial institutions over the period 2002–2009,
O’Sullivan et al. (2015) find that the CEO duality has no effect on all perfor-
mance measures, namely the Q of Tobin, the return on assets ratio, the loan loss
reserve ratio, the non-performing assets ratio, and the net charge-offs ratio.
Similarly, Switzer and Wang (2013) find an insignificant relationship between
CEO duality and credit risk of US banks between 2001 and 2007.
However, Grove et al. (2011) find a negative relation between CEO duality and
return on assets ratio and insignificant relation with loan quality.
H3 We expect that the CEO duality affects banks’ non-performing loans.
In small banks, the size of the board of directors is relatively smaller than
those of medium and large banks. The duality, in this case, will be an opportunity
for the CEO to have excessive power in the direction of the bank and will neutral-
ize the control role of the board. So, the duality can weaken the board’s independ-
ence and can, therefore, indicate a fragility in corporate governance (Yermack
1996; Grove et al. 2011). In addition, the excessive power of the CEO can raise
agency costs and reduce financial performance (Florackis and Ozkan 2009).
However, Liang et al. (2013) propose that duality has a positive effect on large
banks. The duality can avoid the conflicts between the two leadership positions
in taking decisions. In addition, when the same person takes the positions of
CEO and chairman of the board simultaneously, it helps large banks to reduce the
reverse effect of the excessive increase in the board size. So, the duality allows
the Chief Executive Officer to concentrate more on the firm objectives, which
leads to an acceleration in decision-making and an increase in the corporate per-
formance and, therefore, to an amelioration of loan quality.
Indeed, the duality will not have the same effect on non-performing loans for
the three categories of bank size (small, medium, large) and the sub-hypotheses
can be formulated as follows:
13
H3.1 We expect a positive relationship between CEO duality and non-performing

loans of small banks.
H3.2 We expect a negative relationship between CEO duality and non-performing

loans of medium banks.
H3.3 We expect a negative relationship between CEO duality and non-performing

loans of large banks.
2.4 The effect of concentrated ownership on non performing loans
According to Grove et al. (2011), the block ownership can be considered as a mech-
anism that aims to align the directors and stockholders’ interests. So, this mecha-
nism may boost the financial performance and the loans’ quality of banks thanks to a
higher level of control.
Iannotta et al. (2007) find that ownership concentration of 181 large European
banks ameliorates the quality of their loans, decreases the risk of their assets and
also the insolvency risk between 1999 and 2004.
Likewise, Shehzad et al. (2010) examine the relation between ownership and the
risk of 500 banks of 50 countries between 2005 and 2007. These authors use NPLs
as a measure of bank riskiness. They find that the level of bad loans is reduced if the
concentration of ownership is more than 50%.
H4 We expect that concentrated ownership reduces the banks’ non-performing

loans.
Principal shareholders have an important role in the control of banks. They can
reduce directors’ power and remove inefficient managers (Prowse 1997). As a con-
sequence, directors will be more effective and risk-averse. However, The number
of principal shareholders in small banks is often limited, compared to large and
medium-sized banks. An excessive percentage of capital held by a few numbers of
majority shareholders leads to the appearance of a principal-agent problem (Burkart
et al. 1997) and more fragility in the corporate governance system and more likeli-
hood to expropriate minority ones (Džanić 2012; Liang et al. 2013). Indeed, there
will be an opportunity for these shareholders to exert pressure on the bank’s man-
agement and to use their influence within the board to give loans to highly-risky pro-
jects without adequate guarantees. Similarly, Louzis et al. (2012) find that owner-
ship concentration is positively related to consumer and business NPLs in the Greek
banking sector. As a consequence for the results of this study, the number of share-
holders holding more than five percent of the bank’s capital will play a large role
in diluting the power of these owners and the control system within the board will
be more effective in reducing any management opportunism (Burkart et al. 1997).
This condition can be met with large and medium-sized banks. Furthermore, the
number of principal shareholders in large banks can be excessive and in this case,
will appear a reverse effect. In fact, the excessive augmentation of the number of
13
A. Tarchouna et al.
majority shareholders will excessively enhance the board size and this will weaken
this mechanism of control (Grove et al. 2011; Louzis et al. 2012). In addition, Young
et al. (2008) argue that the increase in ownership concentration will lead to the emer-
gence of majority-minority shareholders’ problem and principal-principal problem.
As a result, the concentration of ownership (with more than five percent of bank
capital) spread over a large number of homeowners will lead to a lack of board con-
trol over the bank lending process, thereby weakening the quality of bank lending.
So, the principal hypothesis can be divided into three sub-hypotheses as follows:
H4.1 We expect a positive relationship between concentrated ownership and non-

performing loans of small banks.
H4.2 We expect a negative relationship between concentrated ownership and non-

performing loans of medium banks.
H4.3 We expect a positive relationship between concentrated ownership and non-

performing loans of large banks.
2.5 The effect of directors and executive officers’ ownership on non performing

loans
Beltratti and Stulz (2012) mention that an elevated percentage of executive owner-
ship in the firm stocks can motivate managers to work more and more in the direc-
tion of shareholders’ interests. Compared to institutions that inappropriately align
the directors’ incentives to the shareholders’ interests, corporations with well-
aligned incentives may have various types of firm risk-taking (Fahlenbrach and
Stulz 2011).
H5 We expect that the directors’ ownership affects banks’ non-performing loans.
Many previous studies affirm the hypothesis stating that directors’ ownership has
a positive effect on firm performance originally proposed by Jensen and Meckling
(1976). In line with this idea, a higher percentage of ownership held by bank direc-
tors encourages them to take more care when taking risks. This argument is essen-
tially valid for small and medium-sized banks. However, for large-sized banks, this
argument can be non-valid. This type of bank is characterized by a large number of
majority shareholders. So, the position of the manager can be marginalized in the
board and could not have the same motivations as managers of small and medium-
sized banks. For this reason, some studies find that directors’ ownership is positively
related to non-performing assets (Zagorchev and Gao 2015). So, the three sub-
hypotheses can be formulated as follows:
H5.1 We expect a negative relationship between directors’ ownership and non-per-

forming loans of small banks.
13
H5.2 We expect a negative relationship between directors’ ownership and non-per-

forming loans of medium banks.
H5.3 We expect a positive relationship between directors’ ownership and non-per-

forming loans of large banks.
3 Model specification
3.1 Dynamic panel data estimation
The econometric model we use in order to explicitly study the relation between bank
corporate governance and NPLs of US commercial banks is the dynamic panel data
estimation in order to consider the time persistence of NPLs. Generally, the dynamic
panel data specification takes the following form:
Yit = 𝛼 + 𝛾Yi,t−1 + 𝛽Xi,t + 𝜈i + 𝜀i,t (1)
where the subscripts i = 1,…,N denotes the cross sections; t = 1,…,T denotes the
number of periods of the panel data; Y denotes NPLs; 𝛼 is the constant term; Xi,t is
the k × 1 vector of explanatory variables, other than Yi,t−1; 𝛽 is a k × 1 vector of coef-
ficients;𝜈i is the unobserved bank individual effects and 𝜀i,t is the error term.
As suggested by Baltagi (2013), with the introduction of the lagged dependent
variable on the right-side of Eq. (1), the traditional estimators like pooled OLS,
fixed effects and random effects are biased and inconsistent. So, we estimate the
Eq. (1) using the GMM dynamic panel data estimation proposed by Arellano and
Bond (1991). The GMM estimation requires the first-differentiation of Eq. (1) so
that we can eliminate the unobserved individual effects 𝜈i as follows:
ΔYit = 𝛾ΔYi,t−1 + 𝛽ΔXi,t + Δ𝜀i,t (2)
The first-differentiation of Eq. (1) has eliminated the bank individual effect but it
has created a new bias due to the correlation between the lagged dependent vari-
able Yi,t−1 and the new error term Δ𝜀i,t.Under the assumption of weak exogeneity of
explanatory variables and the absence of serial correlation of error terms, Arellano
and Bond propose the consideration of two moment conditions:
[ ( )]
E Yi,t−s Δ𝜀i,t = 0 for t = 3, … , T; s ≥ 2 and
[ ( )]
E Xi,t−s Δ𝜀i,t = 0 for t = 3, … , T; s ≥ 2
These orthogonality restrictions are important for the GMM estimation that pro-
duces consistent estimators, as a result of the hypothesis of the independence and
the homoscedasticity of residuals.
The strength of the dynamic GMM model lies in the need to use instruments
which should be correlated with the dependent variable but not with the error term.
So, in order to test the overall validity of the used instruments in our model, we
use the Sargan test for over-identification restrictions to ensure the consistency of the
13
A. Tarchouna et al.
GMM estimators. This test produces a statistic distributed χ2 and checks the absence
of correlation between all the used instruments in the model and the residuals.
Additionally, we test the Arrelando and Bond serial correlation tests using AR
(1) and AR (2) statistics, the first and the second order autocorrelation of residuals
in the differenced equation. Unlike the first-order serial correlation, the existence of
second order serial correlation means that the error terms at level are serially corre-
lated and can, therefore, make the dynamic GMM estimation inconsistent (Arellano
and Bond 1991).
3.2 Econometric specification
Generally, previous studies explained bank NPLs solely by two kinds of factors
bank-specific and macroeconomic determinants. Accordingly, Eq. (2) takes the fol-
lowing form:
3 3
∑ ∑
ΔBLit = 𝛼 + 𝛾ΔBLi,t−1 + 𝛽1 ΔBSi,t + 𝛽2 ΔMEt + Δ𝜀i,t (3)
j=1 j� =1
Given that bank loan quality can also be explained by its corporate governance fea-
tures, on the right side of Eq. (3) we successively add the corporate governance
variables in addition to the bank-specific and macroeconomic variables in separate
regressions. So, the econometric model of our study can be expressed by Eq. (4) as
follows:
3 3
∑ ∑
ΔBLit = 𝛾ΔBLi,t−1 + 𝛽1 ΔBSi,t + 𝛽2 ΔMEt + 𝛽3 ΔCGi,t + Δ𝜀i,t (4)
j=1 j� =1
With i denotes the ith bank i = 1,…,184 and t denotes the tth year t = 2000,…, 2013.
In Eq. (4), the subscripts ΔBL denotes the first difference of NPLs ratio, 𝛼 is the con-
stant term, ΔBSi,t is the vector of bank-specific variables, ΔMEt is the vector of mac-
roeconomic variables, CG denotes the corporate governance variables,𝛽 is a vector
of coefficients and 𝜀i,t is the error term.
We estimate the model in Eq. (4) separately for every asset-size group of banks
and for the full sample, by successively integrating each of corporate governance
variables so as to study its additive explanatory power.
4 Dataset
The initial sample of our study is composed of all US commercial banks available
in the Thomson One Banker database with Global Industry Classification Standard
(GICS) code equals to 401,010. Then, while large financial institutions were in the
middle of public focus during the global financial crisis as suggested by Beltratti
and Stulz (2012) and Erkens et al. (2012), we restrict our sample to US commercial
banks having total assets more than $1 Billion following Bedendo and Bruno (2012).
13
Moreover, due to the unavailability of bank corporate governance data each year in
the Thomson One Banker database, we hand-collect detailed information relative to
board characteristics and ownership structure from annual reports (10K form) and
proxy statements (DEF14A form) published by the SEC’s EDGAR database and on
the official websites of commercial banks. Following Pathan (2009) and Renée B
Adams and Mehran (2012), we measure governance information on the proxy state-
ment date which corresponds to the start of each fiscal year. So, the process of gov-
ernance data collection was adapted to consider that proxy statements divulge some
governance data of the prior fiscal year (e.g., the ownership percentage of principal
shareholders) and other governance data concerning the next fiscal year (e.g., the
number of members on the board of directors). Given the cost and the implicated
effort in the hand collection of governance data, our final sample consists of 2576
observations. In fact, our sample is the intersection of available information con-
cerning US commercial banks in DEF 14A proxy statements, 10K annual reports
and “Thomson One Banker” database between 2000 and 2013. Regarding the bank-
specific characteristics, corresponding data was collected from balance sheets and
income statement available in Thomson One Banker database. Moreover, macroe-
conomic variables were collected from diverse sources: DATASTREAM database,
World Economic Outlook Database, the websites of International Monetary Fund,
OECD, Board of Governors of the Federal Reserve System and International Finan-
cial Statistics. Given that bank-size groups have different risk profiles and following
Black and Hazelwood (2013), we divide our sample into three asset size classes:
(i) small: total assets less than $2.5 Billion, (ii) medium: total assets between $2.5
Billion and $10 Billion and (iii) large banks: total assets greater than $10 Billion.
Hence, our final sample is composed of 184 US commercial banks. To highlight the
impact of the global financial crisis on the relation between bank corporate govern-
ance and NPLs, our period of study is from 2000 to 2013.
5 Variables definition
In this section, we define both types of variables, being the dependent and independ-
ent ones.
5.1 The dependent variable
The dependent variable of our study is the ratio of non-performing loans defined
by the quotient between non-performing loans and total loans following Stiroh and
Metli (2003), Lu and Whidbee (2013) and Ghosh (2015).
According to Stiroh and Metli (2003), Lu and Whidbee (2013) and Ghosh (2015),
the usual measure of non-performing loans is the sum of non-accrual loans and all
loans that are past due for ninety days or more.
Referring to Stiroh and Metli (2003), non-accrual loans are loans not earning the
predetermined interest rate because the complete assemblage of principal is uncer-
tain or the payment of interests has not been completed.
13
A. Tarchouna et al.
5.2 The independent variables: corporate governance variables
Following previous literature, the independent variables selected in our study are
the corporate governance variables.
Among corporate governance variables, we use three board characteristics:
board size, board independence and the duality of CEO and Chairman functions
in addition to two variables of ownership structure, being concentrated ownership
and directors and executive officers’ ownership. The definition of the above men-
tioned variables are presented in the following section:
5.2.1 Board size
The board size is measured by the number of members existing on the board of
directors.
5.2.2 Board independence
Like Minton et al. (2014), we measure board independence by the ratio of inde-
pendent directors to total board members. The independence of directors is
defined according to the listing standards of the NASDAQ, the New York Stock
Exchange rules and the Governance Guidelines of banks.
5.2.3 CEO duality
The CEO duality is defined, in our study, by a dummy variable that equals to
one if the same person serves as the chairman of the board and Chief Executive
Officer and zero otherwise.
5.2.4 Concentrated ownership
In order to measure concentrated ownership for each bank, we follow two steps:
First, we look for shareholders designed as “Principal Shareholders” in the DEF
14A proxy statement. Those block holders are the beneficial owners of five per-
cent or more in the bank outstanding shares. Then, we calculate the sum of these
percentages.
5.2.5 Directors and executive officers’ ownership
Zagorchev and Gao (2015) use directors’ ownership among other corporate gov-
ernance variables of their corporate governance index (CG41) in order to ana-
lyze the impact of corporate governance on risk-taking and performance in US
financial institutions between 2002 and 2009. Those authors find that directors’
13
ownership has a positive influence on non-performing assets of US financial

institutions.
5.3 The control variables
This section presents the control variables selected in our study, namely bank-spe-
cific and macroeconomic variables.
5.3.1 Bank‑specific variables
The bank-specific variables, used in our study, are the bank size, the provisions for
loan losses and the diversification opportunities.
5.3.1.1 Bank size Bank size is calculated by the natural logarithm of total assets fol-
lowing Alhassan et al. (2014) and Chaibi and Ftiti (2015).
There is no compromise in previous studies regarding the effect of bank size on
its loan quality. On the one hand, under the “too big to fail” hypothesis Stern and
Feldman (2004), Louzis et al. (2012) and Chaibi and Ftiti (2015), suggest that bank
size is positively related to NPLs. On the other hand, based on the explanation of
diversification by bank size, Salas and Saurina (2002), Rajan and Dhal (2003), HU
et al. (2004), Biekpe (2011) and Alhassan et al. (2014) suggest that bank size is
negatively related to NPLs.
5.3.1.2 Provisions for loan losses The measure of bank provisions for loan losses
used in our study is the ratio of loans loss provisions to total loans like Boudriga
et al. (2009) and Nikolaidou and Vogiazas (2014). In previous literature, there is no
consensus on the effect of provisioning rate on loan quality. While Hasan and Wall
(2004), Ahmad and Ariff (2007) and Chaibi and Ftiti (2015) find a positive rela-
tionship between NPLs and provisions, Boudriga et al. (2009) show a negative link
between loan loss provisions and non-performing loans.
5.3.1.3 Diversification opportunities Following Louzis et al. (2012), Alhassan et al.

(2014) and Chaibi and Ftiti (2015), we use the ratio of non-interest income to total
income as a measure of bank diversification opportunities. In fact, this measure char-
acterizes the reliance of banks on diverse types of revenues other than interest income.
Salas and Saurina (2002), Rajan and Dhal (2003) and HU et al. (2004) show that
the diversification opportunities is negatively related to NPLs given that the diver-
sification of the source of bank incomes decreases its reliance on interest incomes
coming from loans repayments and can, therefore, reduce the level of NPLs.
5.3.2 Macroeconomic variables
The macroeconomic variables, used in our study, are the interest rate, the unemploy-
ment rate in addition to the global financial crisis.
13
A. Tarchouna et al.
5.3.2.1 Interest rate The measure of interest rate, used in our study, is the real
interest rate defined by the difference between long-term interest rate and infla-
tion rate like Castro (2013) and Chaibi and Ftiti (2015).Given that the increase of
interest rate can weaken the capacity of borrowers to pay back the service of debt,
Fofack (2005), Klein (2013) and Castro (2013) find a positive relation between
interest rate and NPLs.
5.3.2.2 Unemployment The economic situation is also reflected by the level of

unemployment that can, in turn, affect the capacity of borrowers to reimburse
debts.
Nkusu (2011), Louzis et al. (2012), Castro (2013) and Chaibi and Ftiti (2015)
show that unemployment rate is positively related to bank NPLs because the increase
of this rate can deteriorate the aptitude of individuals and firms to repay loans.
5.3.2.3 Global financial crisis In order to study the effect of the global financial
crisis on NPLs, we use a dummy variable that equals 1 during the crisis period
and 0 otherwise.
In fact, during the global financial crisis borrowers are unable to reimburse
their debts, which leads to a sharp rise in bank NPLs.
Castro (2013) finds that the crisis is positively related to the credit risk of
GIPSI countries between 1997 and 2011.
The definition of the bank-specific, macroeconomic and corporate governance
determinants and their expected sign as well as the various studies using these
variables, are summarized in Table 1.
The descriptive statistics of all variables employed in our analysis are reported
in Table 2.
In Table 2, we notice that the minimum values of Provisions for loan losses
variable (LLP) are negative for the three sub-samples of US commercial banks.
To interpret this result, we can state that the commitment of bankers to create
loan losses’ provisions reflects their belief on the bank’s potential performance
(Ahmed et al. 1999). In such a situation, managers may lower the provisions for
loan losses and increase the reported profitability in order to ameliorate bank
financial health. Indeed, bank managers look for reassuring their investors and
guarantee them expected distributions. However, such a strategy will increase the
bank’s inability to cover liquidity losses resulting essentially from Non-perform-
ing loans. As a consequence, this strategic choice could be risky, especially in the
aftermath of the global financial crisis (Table 3).
6 Results and discussion
In this section, we present the correlation between bank-specific, macroeconomic

and corporate governance variables. Then, we test the stationarity of all variables,
used in our study, via three panel unit root tests, whose results are presented in
13
Table 1 Definition of variables and previous literature finding
Variables Definition Authors
Dependent variable Non-performing loans The ratio of non-performing Stiroh and Metli (2003);
loans to total loans. Non- Lu and Whidbee (2013);
performing loans are the Ghosh (2015); Tarchouna
sum of loans past due more et al. (2017) and Tarchouna
than 90 days and nonac- et al. (2019b)
crual loans
Independent variables
Corporate governance vari- Variables Definition Authors Expected sign
ables
Positive Negative
Board size The number of members on Grove et al. (2011) O’Sullivan et al. (2015) ±
the board of directors
Directors’ Independence The ratio of independent ±
directors to total board
members
The independence of direc-
tors is defined by the listing
standards of the NAS-
DAQ, the New York Stock
Exchange rules and the
Governance Guidelines
CEO duality Dummy variable equals to 1 ±
if the same person serves as
the chairman of the board
and Chief Executive Officer
and 0 otherwise
13
Table 1 (continued)
13
ables
Positive Negative
Concentrated ownership The sum of percentages Iannotta et al. (2007), She- ±

owned by the principal hzad et al. (2010), Grove
shareholders (having et al. (2011)
more than 5% of the bank
capital)
Directors and executive The percentage of owner- Zagorchev and Gao (2015) ±
officers’ ownership ship held by all directors
and executive officers of
the bank
Bank-specific determinants Bank size The natural logarithm of Stern and Feldman (2004), de Lis et al. (2001), Salas ±
banks total assets Louzis et al. (2012), and Saurina (2002), Rajan
Chaibi and Ftiti (2015) and and Dhal (2003), HU et al.
Tarchouna et al. (2017) (2004), Biekpe (2011),
Provisions for loan losses Loan loss provisions/total Hasan and Wall (2004), Boudriga et al. (2009) +
loans Ahmad and Ariff (2007),
Chaibi and Ftiti (2015),
Tarchouna et al. (2017) and
Tarchouna et al. (2019b)
Diversification opportunities Non-interest income/total Salas and Saurina (2002), −
income Rajan and Dhal (2003),
Alhassan et al. (2014)
Macroeconomic determi- Interest rate The real interest rate Aver (2008); Nkusu (2011); +
nants Louzis et al. (2012); Castro
(2013);
A. Tarchouna et al.
Table 1 (continued)
ables
Positive Negative
Unemployment The unemployment rate Nkusu (2011), Louzis et al. +

(2012), Castro (2013),
Chaibi and Ftiti (2015)
Crisis Dummy variable equals Castro (2013), Tarchouna +
to 1 during the global et al. (2017) and Tarchouna
financial crisis period and 0 et al. (2019b)
otherwise
13
Table 2 Descriptive Statistics
Small Banks Medium Banks Large Banks
13
Mean Max Min Std Dev Mean Max Min Std Dev Mean Max Min Std Dev
Corporate governance
BOARDS 11.136 21.000 5.000 2.718 12.750 31.000 6.000 4.000 14.277 31.000 6.000 4.075
DUAL 0.431 1.000 0.000 0.495 0.369 1.000 0.000 0.482 0.768 1.000 0.000 0.422
BOARD_INDEP 0.756 0.944 0.250 0.122 0.764 1.000 0.392 0.122 0.786 0.937 0.000 0.156
Concentrated_OW 17.606 89.210 0.000 14.657 19.845 79.800 0.000 16.370 16.774 93.900 0.000 15.833
DIROW 17.163 70.200 1.300 13.181 14.388 66.400 1.000 14.067 6.673 77.200 0.120 11.749
Bank-specific
NPL 2.110 58.949 0.000 4.025 1.399 15.544 0.000 1.6425 1.366 9.599 0.053 1.436
INCOME_DIV 0.152 0.545 − 10.032 0.313 0.181 1.000 − 0.038 0.083 0.300 0.630 − 0.096 0.111
LLP 0.007 0.108 − 0.016 0.011 0.013 2.145 − 0.019 0.105 0.009 0.096 − 0.004 0.011
SIZE 7.236 8.813 4.456 0.532 8.317 10.015 3.664 0.663 10.596 14.697 7.814 1.557
Macroeconomic
RIR 1.484 3.620 − 0.342 1.147 1.484 3.620 − 0.342 1.147 1.484 3.620 − 0.342 1.147
UNEMP 6.385 9.625 3.967 1.838 6.385 9.625 3.967 1.838 6.385 9.625 3.967 1.838
CRISIS 0.286 1.000 0.000 0.452 0.286 1.000 0.000 0.452 0.286 1.000 0.000 0.452
Observations 1162 896 518
The table reports the mean, the maximum, the minimum and the standard deviation of each variable by Asset Size class. Different notations used in the table are defined
as follows: BOARDS is the board size measured by the number of members on the board of directors, DUAL is the CEO duality measured by a dummy variable that equals
to 1 if the same person serves as the chairman of the board and Chief Executive Officer and 0 otherwise BOARD_INDEP is the board independence measured by the ratio
between the independent directors and the total board members, Concentrated_OW is the concentrated ownership proxied by the sum of percentages owned by the princi-
pal shareholders (having more than 5% of the bank capital), DIROW is the percentage of ownership held by all directors and executive officers of the bank. NPL is the ratio
of non-performing loans to total loans, INCOME_DIV is the income diversification ratio measured by the quotient between non-interest income and total income, LLP is
the provisions for loan losses to total loans, SIZE is the bank’s size measured by the natural logarithm of total assets, RIR is the real interest rate measured by the difference
between long-term interest rate and inflation rate, UNEMP is the unemployment rate, CRISIS is a dummy variable of the global financial crisis
A. Tarchouna et al.
Table 4. Also, we show the results of the different estimations for the full sample
and for the three size-groups of US commercial banks in Tables 5, 6, 7 and 8.
6.1 Correlation between variables
As presented in the correlation matrix, there is a low cross correlation between

bank-specific, macroeconomic and corporate governance variables.
6.2 Panel unit root tests results
Before proceeding with our empirical study, we should check the order of integra-
tion of all the variables used in our analysis. Hence, for more robustness of our
results, we use three panel unit root tests, namely the Levin, Lin and Chu (LLC), the
Im, Pesaran and Shin (IPS) and the ADF-Fisher.
Generally, variables should be stationary at 1% level under the three panel unit
root tests. However, if a variable is non-stationary at level, at least by one panel unit
root test, it should be included in the model at its first-difference form in order to
induce stationarity.
Table 4 presents the results of the three panel unit root tests and shows that the
bank-specific and macroeconomic variables are stationary at 5% significance level
and, thus, integrated into our model at their level. Under the ADF-Fisher chi-square
test, the NPLs variable is non-stationary at level because its p-value equals to
0.0563.
Concerning corporate governance variables, it is worth pointing out that the CEO
duality, the board independence, and the directors’ ownership variables are non-
stationary at level based on the Im, Pesaran and Shin and ADF-Fisher tests with
p-values more than 5%. Additionally, the concentrated ownership variable is non-
stationary at level under the three panel unit root tests.
It is to be noted that previous studies did not consider the non-stationarity of cor-
porate governance as they have either examined the effect of corporate governance
during a short period or assumed that the corporate governance data are constant.
However, Table 4 shows that four corporate governance variables (CEO duality,
board independence, concentrated ownership and directors’ ownership) are non-sta-
tionary and should be integrated at their first-difference. Hence, taking into account
these results, we can proceed with our analysis by inserting the stationary variables
in our model.
6.3 Dynamic panel data estimation results
The central objective of this study is to empirically examine the influence of various
board characteristics and ownership structure on bank loan quality using dynamic
panel GMM estimation in order to consider the time persistence of NPLs.
To provide a comparative analysis, we present the results of the full sample and
the three size classes of US commercial banks. For each asset-size group, we regress
NPLs ratio on bank-specific and macroeconomic determinants and we successively
13
13
Table 3 The correlation matrix
BOARD_ BOARDS CRISIS DIROW DUAL INCOME_ LLP Concen- NPL RII ROE SIZE UNEMP
INDEP DIV trated_OW
BOARD_ 1.00000
INDEP
BOARDS − 0.031107 1.00000
CRISIS − 1.05E − 05 0.008091 1.00000
DIROW − 0.426002 0.027853 − 0.030674 1.00000
DUAL 0.016872 0.067580 0.034153 − 0.131036 1.00000
INCOME_ 0.056965 0.092733 − 0.073361 − 0.097815 0.089982 1.00000
DIV
LLP − 0.006974 − 0.018378 0.010567 0.076483 0.037041 0.004219 1.00000
Concen- − 0.295569 − 0.093776 − 0.047714 0.468030 − 0.091727 0.017121 0.038828 1.00000
trated_
OW
NPL 0.022074 − 0.079408 0.054530 0.025482 − 0.010209 0.006688 0.099474 0.138882 1.00000
RII − 0.072851 0.054153 0.121376 0.088306 0.027057 − 0.048350 0.041864 − 0.087413 − 0.055633 1.00000
ROE 0.011462 0.005009 − 0.061451 − 0.031806 0.034936 − 0.002812 − 0.008819 − 0.014714 − 0.052100 − 0.023200 1.00000
SIZE 0.141472 0.283447 0.077384 − 0.352495 0.194150 0.257880 − 0.012542 − 0.038237 − 0.003098 − 0.134048 − 0.019117 1.00000
UNEMP 0.103632 − 0.065864 − 0.107320 − 0.130651 − 0.059701 0.115985 0.044365 0.113620 0.361817 − 0.192278 − 0.052209 0.170961 1.00000
A. Tarchouna et al.
Table 4 Panel unit root tests results
Level First difference
Levin, Lin and Chu t Im, Pesaran and Shin ADF-Fisher chi- Levin, Lin and Chu t Im, Pesaran and Shin ADF-Fisher
W-stat square W-stat chi-square
Non-performing loans − 8.57030 − 3.25240 412.034 − 12.8706 − 9.42974 622.912

(0.0000) (0.0006) (0.0563) (0.0000) (0.0000) (0.0000)
Board size − 12.9450 − 4.71892 495.413 − 21.6360 − 15.6307 840.936
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
CEO duality − 3.46789 0.43435 109.022 − 7.77702 − 6.12579 110.170
( 0.0003) (0.6680) (0.9442) (0.0000) (0.0000) (0.0000)
Board independence − 1.69369 (0.0452) 1.55304 311.585 − 16.8429 − 15.4446 840.706
(0.9398) (0.9310) (0.0000) (0.0000) (0.0000)
Concentrated ownership 2.89907 2.23048 355.205 − 8.74905 − 13.9041 793.066
(0.9981) (0.9871) (0.4421) (0.0000) (0.0000) (0.0000)
Directors’ ownership − 6.46111 0.85148 369.342 − 16.0065 − 15.2739 837.875
(0.0000) (0.8027) (0.3284) (0.0000) (0.0000) (0.0000)
Income diversification − 5.90754 − 2.86381 504.375 − 14.2051 − 11.2088 706.988

(0.0000) (0.0021) (0.0000) (0.0000) (0.0000) (0.0000)
Loan loss provisions − 45.0952 − 10.9220 603.121 − 40.5939 − 15.0730 801.309
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Bank size − 17.9823 − 2.27319 503.899 − 8.70785 − 7.14180 560.493
(0.0000) (0.0115) (0.0000) (0.0000) (0.0000) (0.0000)
Real interest rate − 19.8144 − 7.44994 506.787 − 48.4488 − 33.6543 1703.61
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Unemployment − 15.8879 − 6.44488 467.375 − 17.7266 − 11.3802 675.237
(0.0000) (0.0000) (0.0003) (0.0000) (0.0000) (0.0000)
Probabilities for Fisher tests are computed using an asymptotic Chi-square distribution. All other tests assume asymptotic normality. Under a null hypothesis of non-sta-
tionary, the Levin, Lin and Chu (LLC) panel unit root test assumes a common unit root process whereas the Im, Pesaran and Shin (IPS) and the ADF-Fisher tests assume
individual unit root processes. For the three panel unit root tests, we report the statistics and the respective p-values in parentheses
13
Table 5 Arellano and Bond dynamic panel GMM estimation: Impact of corporate governance variables on non-performing loans for the Full sample
Board size CEO Duality Board independence Concentrated ownership Directors’ ownership
13
NPL (− 1) 0.588976*** 0.614092*** 0.698911*** 0.541869*** 0.481644***
(0.011051) (0.011572) (0.013090) (0.008712) (0.009522)
LLP − 2.205499 21.53869*** 16.87668*** 33.76384*** 79.21830***
(2.295619) (4.747290) (3.485552) (4.200313) (5.421236)
INCOME_DIV − 0.039723 − 1.673684** 0.097172*** 0.088648*** − 1.065099*
(0.032107) (0.789554) (0.032027) (0.029866) (0.550683)
SIZE − 0.286940** 0.647268*** 0.860611*** 1.096940*** − 0.299702**
(0.145524) (0.167402) (0.214430) (0.102875) (0.138066)
RIR − 0.016557 0.000588 0.030719 0.045223** 0.010202
(0.022338) (0.016220) (0.020048) (0.017715) (0.014751)
UNEMP 0.531555*** 0.418913*** 0.377494*** 0.301039*** 0.127781***
(0.027956) (0.033472) (0.030193) (0.026880) (0.036564)
CRISIS 1.400018*** 1.025904*** 1.112702*** 0.870665*** 0.641179***
(0.085743) (0.093807) (0.090980) (0.077535) (0.082843)
Board size 0.949708***
(0.071559)
CEO Duality 4.296247***
(0.247143)
CEO Duality (− 1) 2.078184***
(0.231680)
Board independence − 5.710107*
(3.084599)
Board independence (− 1) − 27.59894***
(2.078932)
Concentrated ownership 0.011767*
(0.006201)
Concentrated ownership (− 1) − 0.082393***
(0.005944)
A. Tarchouna et al.
Table 5 (continued)
Board size CEO Duality Board independence Concentrated ownership Directors’ ownership
Directors’ ownership − 0.179045***

(0.017411)
Directors’ ownership (− 1) − 0.057159***
(0.011613)
Sargan test 93.99584 85.41533 87.15094 85.66806 81.95413
[p-value] [0.091283] [0.116740] [0.140752] [0.113106] [0.103257]
AR(1) − 2.952984 − 2.231559 − 8.687681 − 2.778581 − 3.016475
[p-value] [0.0031] [0.0256] [0.0000] [0.0055] [0.0026]
AR(2) − 0.452439 − 0.371588 − 0.431362 − 0.819621 0.846854
[p-value] [0.6510] [0.7102] [0.6662] [0.4124] [0.3971]
Standard Errors are reported in parentheses

The p-values of the Sargan test and the p-values of the Arellano-Bond serial correlation tests are reported in brackets
***Denote significance at 1% respectively
**Denote significance at 5% respectively

*Denote significance at 10% respectively
13
Table 6 Arellano and Bond dynamic panel GMM estimation: Impact of corporate governance variables on non-performing loans for small banks ($1 Bil-
lion < Assets < $2.5Billion)
Board size CEO Duality Board independence Concentrated ownership Directors’ ownership Expected sign
13
NPL (− 1) 0.593106*** 0.633473*** 0.660736*** 0.571421*** 0.488934*** +
(0.002063) (0.003102) (0.002215) (0.001071) (0.001761)
LLP 29.99021*** 37.66913*** 7.793386*** 50.65228*** 73.19666*** +
(1.224930) (2.631149) (1.847717) (1.096272) (2.139551)
INCOME_DIV 0.006092 − 0.542208*** 0.103741*** 0.204936*** − 0.098203* −
(0.008807) (0.188083) (0.009291) (0.007055) (0.056202)
SIZE − 1.341746*** 0.455717*** − 1.241223*** 1.301931*** 0.035519 ±
(0.029002) (0.040712) (0.040648) (0.024601) (0.055249)
RIR − 0.113659*** − 0.028178*** − 0.247757*** 0.038259*** 0.001708 +
(0.005301) (0.007670) (0.004427) (0.006393) (0.005144)
UNEMP 0.810623*** 0.807151*** 0.900264*** 0.550391*** 0.544093*** +
(0.005951) (0.019357) (0.006440) (0.008171) (0.008300)
CRISIS 2.183426*** 2.049070*** 2.928575*** 1.763619*** 1.798932*** +
(0.022690) (0.039510) (0.022408) (0.023415) (0.027326)
Board size 0.743511*** +
(0.010350)
CEO duality 5.563197*** +
(0.073207)
CEO duality (− 1) 1.481415*** +
(0.039665)
Board independence 2.098809*** +
(0.185417)
Board independence (− 1) − 29.85190*** +
(0.324800)
Concentrated ownership 0.021682*** +
(0.001252)
Concentrated ownership (− 1) − 0.091416*** +
A. Tarchouna et al.
(0.000958)
Table 6 (continued)
Directors’ ownership − 0.112537*** −

(0.004049)
Directors’ ownership (− 1) − 0.075462*** −
(0.004227)
Sargan test 77.75471 76.28397 76.38349 76.78098 76.65482
[p-value] [0.360107] [0.312591] [0.370395] [0.298691] [0.196546]
AR(1) − 2.556972 − 2.199612 − 4.229744 − 2.475783 − 2.471291
[p-value] [0.0106] [0.0278] [0.0000] [0.0133] [0.0135]
AR(2) 0.333045 0.304674 0.142315 − 0.278560 0.816189
[p-value] [0.7391] [0.7606] [0.8868] [0.7806] [0.4144]


13
Table 7 Arellano and Bond dynamic panel GMM estimation: Impact of corporate governance variables on non-performing loans for Medium banks ($2.5 Bil-
lion < Assets < $10 Billion)
Board size CEO duality Board independence Concentrated ownership Directors’ ownership Expected sign
13
NPL (− 1) 0.518687*** 0.479406*** 0.563334*** 0.533064*** 0.486677*** +
(0.004649) (0.004751) (0.005567) (0.005954) (0.013113)
LLP 4.877274*** 6.435624*** 6.680557*** 23.54588*** 50.66863*** +
(0.139864) (0.217673) (0.222422) (0.499377) (0.924588)
INCOME_DIV − 7.367525*** − 5.492837*** − 7.207769*** − 6.593358*** − 5.431306*** −
(0.147755) (0.265160) (0.149859) (0.177858) (0.286485)
SIZE 0.348314*** 0.274775*** 0.621549*** 0.579108*** 0.309022*** ±
(0.043728) (0.040214) (0.040325) (0.048718) (0.072639)
RIR 0.159938*** 0.116105*** 0.135871*** 0.121703*** 0.060974*** +
(0.006602) (0.007173) (0.008313) (0.006030) (0.007459)
UNEMP 0.281795*** 0.312936*** 0.223915*** 0.217155*** 0.133857*** +
(0.005513) (0.009960) (0.008260) (0.007752) (0.010898)
CRISIS 0.714657*** 0.778148*** 0.723235*** 0.546985*** 0.430652*** +
(0.019304) (0.029610) (0.026203) (0.022364) (0.025586)
Board size − 0.037526*** −
(0.006435)
CEO duality − 0.555412*** −
(0.054381)
CEO duality (− 1) 1.489350*** −
(0.048673)
(0.239609)
Board independence (− 1) − 2.419800*** +
(0.348152)
Concentrated ownership − 0.011202*** −
(0.002252)
Concentrated ownership (− 1) − 0.001078 −
A. Tarchouna et al.
(0.001518)
Table 7 (continued)
Board size CEO duality Board independence Concentrated ownership Directors’ ownership Expected sign
Directors’ ownership − 0.082009*** −

(0.003986)
Directors’ ownership (− 1) 0.028835*** −
(0.004092)
Sargan test 61.19297 59.52704 59.90863 61.04785 56.64050
[p-value] [0.294989] [0.314361] [0.302250] [0.267688] [0.413578]
AR(1) − 3.854516 − 2.495980 − 3.087190 − 2.757671 − 3.179140
[p-value] [0.0001] [0.0126] [0.0020] [0.0058] [0.0015]
AR(2) − 0.810111 − 1.595917 − 1.592316 − 1.322368 − 1.068567
[p-value] [0.4179] [0.1105] [0.1113] [0.1860] [0.2853]


13
Table 8 Arellano and Bond dynamic panel GMM estimation: Impact of corporate governance variables on non-performing loans for Large banks (Assets > $10 Billion)
13
NPL (− 1) 0.240871*** 0.240207*** 0.248382*** 0.242579*** 0.261142*** +
(0.025939) (0.026823) (0.021896) (0.022546) (0.020208)
LLP 45.03979*** 45.77877*** 48.31628*** 45.05954*** 39.63744*** +
(3.816550) (2.077224) (2.614375) (4.027283) (2.508504)
INCOME_DIV 0.080657 − 1.541121*** − 0.492330 1.341660 1.554276*** −
(0.305404) (0.566289) (0.486993) (0.854742) (0.531634)
SIZE − 0.043736 − 0.124700** − 0.283073*** 0.254735** 0.011685 +/−
(0.075987) (0.059358) (0.069433) (0.114204) (0.166616)
RIR − 0.048910*** − 0.027355** − 0.035792*** − 0.028505 − 0.086626*** +
(0.013041) (0.010731) (0.009782) (0.023330) (0.019613)
UNEMP 0.269640*** 0.261981*** 0.221408*** 0.227336*** 0.283154*** +
(0.022857) (0.024665) (0.023169) (0.028463) (0.025368)
CRISIS 0.444612*** 0.303990*** 0.350829*** 0.372335*** 0.567580*** +
(0.033958) (0.024806) (0.025646) (0.061170) (0.045767)
Board size 0.079625*** +
(0.013250)
CEO duality − 0.064575 −
(0.079440)
CEO duality (− 1) − 0.212401*** −
(0.052407)
(0.404663)
Board independence (− 1) 1.094477*** +
(0.347867)
Concentrated ownership 0.027620*** +
(0.004656)
Concentrated ownership (− 1) − 0.016621*** +
(0.005055)
A. Tarchouna et al.
Table 8 (continued)
Directors’ ownership 0.014019 +

(0.019975)
Directors’ ownership (− 1) 0.023835 +
(0.023974)
Sargan test 29.13125 26.49634 29.15474 24.92725 29.10990
[p-value] [0.458246] [0.545782] [0.404711] [0.631792] [0.406970]
AR(1) − 2.323222 − 3.156743 − 3.300391 − 2.272415 − 0.828085
[p-value] [0.0202] [0.0016] [0.0010] [0.0231] [0.4076]
AR(2) 0.002414 0.367842 0.089903 0.243467 0.439658
[p-value] [0.9981] [0.7130] [0.9284] [0.8076] [0.6602]


13
A. Tarchouna et al.
add the board size, the CEO duality, the board independence, the concentrated own-
ership and the directors’ ownership as corporate governance variables in separate
regressions.
Therefore, Tables 5, 6, 7 and 8 present the results of the effect of corporate gov-
ernance, bank-specific and macroeconomic variables on NPLs in small, medium and
large banks in addition to the full sample. These tables report the coefficients and
the standard errors of these variables. Besides, in the bottom of these tables we show
the results of the Arellano and Bond serial correlation tests and the Sargan test for
over-identification of all instruments.
In all regressions, it is to mention that the p-values of Sargan test are more than
0.1. This suggests the absence of correlation between the used instruments and
residuals and, hence, the validity of selected instruments. Additionally, as shown by
AR (1) and AR (2) p-values, the null hypothesis of no first-order autocorrelation is
rejected which is not the case for the null hypothesis of no second order autocorrela-
tion of residuals in all the regressions. This confirms the validity of all models and
the consistency of our estimation results.
Previous studies like Grove et al. (2011), Fahlenbrach and Stulz (2011), Aebi
et al. (2012), Beltratti and Stulz (2012) use the bank corporate governance data for
one year and examine its impact during the following years. This can explain the
insignificant effect of CEO duality on loan quality found by Grove et al. (2011),
Switzer and Wang (2013) and O’Sullivan et al. (2015). However, in our study, we
examine the change of corporate governance system in US commercial banks during
a long period, given that the implication of corporate governance cannot be mate-
rialized in just one year as suggested by Sun et al. (2009) and Beltratti and Stulz
(2012). In fact, by extending the period of our study to 14 years, we find the sig-
nificant impact of the CEO duality. This finding reflects the importance of the effect
of CEO duality on NPLs when treating it over a long period. As shown in Table 5,
the relationship between the CEO duality and the NPLs in the full sample of US
commercial banks is positive and significant. This finding indicates that if the same
person serves as the chairman of the board and the Chief Executive Officer at the
same time, the level of NPLs can rise by a 4.296247 coefficient as the CEO can take
non-optimal decisions. Likewise, the one-period lagged CEO duality variable posi-
tively affects the NPLs of the full sample of US commercial banks by a 2.078184
coefficient.
The impact of the board size on the NPLs in the full sample is positive and sig-
nificant at 1% level but the theoretical divergence is clearer when taking each size-
group of US commercial banks separately.
The results presented in Table 5 show that the board independence affects the
NPLs of the full sample of US commercial banks negatively and significantly. This
result corroborates the finding of Liang et al. (2013). However, this relationship
changes when segregating the full sample into three asset-size groups, as presented
in Tables 6, 7 and 8.
However, the concentrated ownership is positively related to the NPLs of the
full sample, but this relationship changes also when taking each size group sepa-
rately. Regarding the lagged concentrated ownership, this mechanism is beneficial
for banks’ loan quality as it reduces the level of bad loans in the full sample and the
13
three asset-size groups of banks. This finding indicates that the past concentrated
ownership is capable of controlling the lending decision and reducing the risk of
US commercial banks. In fact, given that banks are characterized by a high opacity
and complexity, the supervision of managers performed by majority owners is very
important, especially in the banking sector. Empirical studies confirm the impor-
tant role played by principal shareholders in the control of banks, given the rarity of
hostile takeovers in the banking sector and the weak aggressiveness of directors to
remove inefficient managers, compared to directors in other sectors (Prowse 1997).
Moreover, the agency theory highlights the active control made by concentrated
ownership and its role in lowering the agency costs (Grove et al. 2011).
Further, Table 5 reports a negative relation between the directors’ ownership vari-
able and NPLs ratio in the full sample. This finding is in line with Beltratti and Stulz
(2012) who argue that superior executive ownership urges managers to ameliorate
shareholders wealth.
As shown in the results presented in Table 6, the effect of board size for small
banks is positive and significant at 1% level with two reasons behind this. First,
interested only in bank profits, the directors on the board of small banks take an
elevated level of risk by lending borrowers with risky projects.Second, the manag-
ers of these banks have more flexibility and so more possibility to be entrenched.
Consequently, they follow an opportunistic behavior and do not take the decisions in
the interests of bank shareholders. Hence, managers’ behavior may, in turn, harm the
bank efficiency and increase the NPLs level of small banks (Yermack 1996; Álvarez
et al. 1998; Eisenberg et al. 1998).
Additionally, we can mention that the extent of the impact of the CEO duality on
NPLs is mostly pronounced in the small banks’ subsample with a positive coeffi-
cient equals to 5.563197. Our finding is consistent with Yermack (1996) who proves
that the duality of the two positions (CEO and chairman of the board) by the same
person can weaken the board independence and can, therefore, indicate a fragility in
the corporate governance (Grove et al. 2011). The CEOs’ autonomy in taking deci-
sions can lead to their entrenchment. This latter can, in turn, have a bad influence on
banks. This point finds evidence with reference to Florackis and Ozkan (2009) who
find that the managerial entrenchment raised agency costs and reduced the financial
performance of UK firms between 1999 and 2005.
Measured by the proportion of independent directors in the total number of direc-
tors of the board, board independence is unable to control the bank lending process
accurately and increase bad loans in small banks. With regard to the influence of the
lagged board independence, we notice a positive relation between this variable and
loan quality of small banks. The coefficients of the lagged board independence are
negative and significant at 1% level in these banks. This finding shows that the board
independence of the previous year ensures a high quality of supervision and control
by reducing the conflicts of interests between insider-directors and bank sharehold-
ers. This result is in line with the findings of De Andres and Vallelado (2008); Cor-
nett et al. (2009) and Liang et al. (2013). Furthermore, we cite Fama and Jensen
(1983), Hermalin and Weisbach (1988), who suggest that independent directors can
be appreciated thanks to their experience, skills and relations and are able to control
banks management better than insiders.
13
A. Tarchouna et al.
Concerning the concentrated ownership, we notice a positive relation between

this variable and the NPLs for small banks. This induces that the concentrated own-
ership has an adverse effect on the loan quality of these banks. To interpret this
result, we can state that a superior percentage of ownership held by majority share-
holders means more fragility in the corporate governance system and more likeli-
hood to expropriate minority ones (Liang et al. 2013). Similarly, Louzis et al. (2012)
find that ownership concentration is positively related to consumer and business
NPLs in the Greek banking sector.
Additionally, Table 6 reports the influence of directors’ ownership variable in
addition to bank-specific and macroeconomic determinants of NPLs for small banks.
The results presented in Table 5 show that the directors’ ownership variable is neg-
atively related to NPLs ratio in small banks estimation. This suggests that higher
percentage of ownership held by bank directors is capable of decreasing the level
of NPLs for small US commercial banks. In fact, as an incentive mechanism, more
percentage of ownership encourages directors to take more care when taking risks,
which, in turn, decreases the likelihood of their entrenchment.
As far as medium banks are concerned, the board of directors is diversified with
additional human capital. It is also characterized by the presence of the representa-
tives of the majority shareholders on the board. Hence, the enlargement of the board
size in medium banks facilitates the supervision and the advice of managers and
reduces their discretionary power (Huse 2005; Zona and Zattoni 2007). So, as sug-
gested by Dalton et al. (1999) and Byron and Post (2016), large boards enable firms
to collect more knowledge and available resources. Thus, the diversification of the
board of directors affects the banks decision process and may have a beneficial effect
on the loan quality of these banks given that the public interest requires risk aver-
sion. In fact, the strategic decisions of the bank are in the hands of major share-
holders and their representatives on the board, which makes the decision no longer
limited to a small number of administrators, which is not the case for independent
directors on the board whose role is just confined to ensuring the information con-
trol and transparency.
Unlike small banks, the effect of CEO duality on medium and large banks’ bad
loans is negative but significant only in medium banks, as shown in the results pre-
sented in Tables 7 and 8. Concerning the lagged CEO duality variable, we find that
it affects small and medium banks’ NPLs positively.
Similarly to small banks, the board independence is incapable of controlling the
lending process of medium banks given that it increases non performing loans for
medum banks subsample.
However, we find that the coefficient of concentrated ownership is negative and
significant at 1% level for medium banks, which implies that the percentage of
shares owned by the principal shareholders negatively affects the level of NPLs in
these banks. This result is consistent with Hanafi and Santi (2013) who find that
ownership concentration decreases the level of bank risk-taking. Additionally, this
finding corroborates Shehzad et al. (2010) results stating that the ownership con-
centration is negatively related to NPLs ratio. These authors claim that, by virtue
of more controlling ownership, the quality of bank management improves leading,
therefore, to a decrease in bad loans.
13
In the same way, the directors’ ownership variable is negatively related to

NPLs of medium banks, as shown by the results presented in Table 7. But, the
one period lagged directors’ ownership variable, in medium banks, is positively
and significantly related to their NPLs. This suggests that the amelioration of cor-
porate governance system, through the increase of ownership of directors of the
previous year in medium banks, can damage their present loan quality. This result
is consistent with Zagorchev and Gao (2015) who find that directors’ ownership
is positively related to non-performing assets of US financial institutions. This
point finds evidence, especially during the global financial crisis when the direc-
tors’ compensation is blamed for being considered even among the causes of the
global financial crisis. In fact, the augmentation of directors’ ownership can lead
to higher entrenchment. These directors may focus only on the short-term banks’
performance to increase their level of ownership, ignoring the excessive level of
risk and its harmful effects in the long-term.
Concerning large banks, Table 8 shows that the positive impact of board size
is seen again but with lesser magnitude. In general terms, when it reaches a cer-
tain level, the increase of the board size can have a reverse effect as noted by
Grove et al. (2011) who show that when becoming excessively large, the board of
directors can not control bank lending process efficiently weakening, therefore,
the quality of bank loans. In the same line of ideas, Jensen (1993) and Eisenberg
et al. (1998) argue that the control, performed by large boards, is inefficient due
to communication and organization difficulties and inner conflicts among direc-
tors. Likewise, De Andres and Vallelado (2008) support that over-sized boards
face many coordination problems in banks decision-making process. Additional
studies on non-financial firms like Yermack (1996); Álvarez et al. (1998) and
Eisenberg et al. (1998) confirm that the difficulties of excessively large boards
outweigh their benefits.
However, the effect of CEO duality on large banks’ non-performing loans is
negative and insignificant. The insignificant relationship between the CEO duality
variable and large banks’ NPLs corraborates Brickley et al. (1997) and Liang et al.
(2013) results. Concerning the lagged CEO duality variable, this relation remains
negative for large banks. Hence, as suggested by Liang et al. (2013), the duality
helps large banks in avoiding the conflicts between the two leadership positions in
taking decisions. That is, the duality allows the Chief Executive Officer to concen-
trate more on the firm objectives, which leads to an acceleration in decision-making
and an increase in the corporate performance and, therefore, to an amelioration of
loan quality. In general terms, the CEO duality has an adverse effect on the bank
loan quality but this mechanism becomes beneficial for the bank if it is too large.
Therefore, the CEO duality is a strength for large banks and able to reduce the
reverse effect of the excessive increase in the board size, as found in Table 8.
Concerning the relation between board independence and NPLs of large banks
remains positive and significant, which indicates the weak role of board independ-
ence in the control of loans quality in large banks. This can reflect the importance
of the control made by insider-directors given that large banks are characterized by
a high information asymmetry. So, insiders enable the transmission of information
between board and management, which makes their presence in these banks more
13
A. Tarchouna et al.
beneficial compared to independent directors (Adams and Ferreira 2007; Coles et al.
2008; Harris and Raviv 2008).
As far as the concentrated ownership is concerned, we find that this variable is
positively related with the NPLs for large banks. This implies that the concentrated
ownership has a bad effect on the loan quality of large banks.
Furthermore, we mention that the relation between directors’ ownership and
NPLs for large banks model is statistically insignificant. This indicates that the
NPLs in large banks are not affected by the percentage of directors’ ownership.
Moreover, as shown in Tables 5, 6, 7 and 8, it is to be noted that the global finan-
cial crisis variable affects positively and significantly the non-performing loans
of the three subsamples of US commercial banks with small banks being mostly
affected. As discussed by Tarchouna et al. (2019b), there are two main reasons
behind this finding: First, the policies of financial intervention supported larger
banking institutions in order to protect the US financial system. Second, the diversi-
fication of their investments allows large banks to overwhelm the contagious effect
of the global financial crisis.
6.4 Discussion
The results presented in Tables 5 suggest that it is difficult to draw a general conclu-
sion on how the corporate governance system affects the loan quality of the full sam-
ple of US commercial banks and judge whether this effect is positive or negative.
For this reason and taking into consideration the difference in risk profile, which
depends on banks’ size, we have provided a comparative analysis by dividing the
full sample into three asset size groups. Table 9 summarizes the sign of the results
found in Tables 5, 6, 7 and 8 for the full sample as well as small, medium and large
US banks.
Based on the results found in Table 9, it is to be noted that small banks are char-
acterized by a weak and fragile corporate governance system given that board size,
CEO duality, board independence and concentrated ownership have a positive
impact on non-performing loans. This result can be explained by the reliance of
small banks on personal connections. In such situation, the corporate governance
Table 9 Summary of the impact of corporate governance variables on non-performing loans for small,
medium and large US banks
Full sample Small banks Medium banks Large banks
($1 Bil- ($2.5 Bil- (Assets > $10
lion < Assets < $2.5Bil- lion < Assets < $10 Billion)
lion) Billion)
Board size + + − +
CEO duality + + − N.S
Board independence − + + +
Concentrated ownership + + − +
Directors’ ownership − − − N.S
13
couldn’t play its control and supervision role properly. Thus, these banks take non-
optimal decisions when choosing their customers, which leads in turn to a bad loan
quality. On the other hand, the percentage of ownership held by the directors of
small banks makes them more prudent when taking risks, which, decreases non-per-
forming loans. Thus, the directors’ ownership mechanism a substitutable corporate
governance mechanism for the other ineffective corporate governance mechanisms.
Concerning medium banks, we notice that these banks are characterized by a
sound corporate governance system. Indeed, the board size, the CEO duality, the
concentrated ownership and directors’ ownership are capable of lowering the level
of non-performing loans in these banks.
As far as large banks are concerned, it is to mention that the corporate governance
system of these banks is neutralized as the effect of corporate governance variables
is either positive or not significant. To interpret this finding, we can state that high-
sized financial institutions are characterized by a high level of liquidity. Due to this
liquidity, large banks are thus engaged in excessive lending practices without taking
notice of the undue losses (Tarchouna et al. 2019a). These banks can lend even to
bad borrowers presenting a high level of risks. This was the case of the global finan-
cial crisis which witnessed the losses and failures of many high-sized institutions
given that bad borrowers were unable to reimburse their debts.
In order to rescue the US financial system, the government promptly intervened
via different measures. Among them, we can cite the Dodd-Frank Act that aimed
to enhance banks’ corporate governance following the financial crisis. The large
focus of the Dodd-Frank Act that dates back to July 21, 2010 is financial institutions.
Among the principal provisions of this act is disclosing the leadership structure of
banks and rules related to the decision of firms with two options, being the separa-
tion or the combination of CEO and chairman roles. Further, the Dodd-Frank Act
orders the presence of independent members on the board, as suggested by Federal
Reserve Board of Governors, depending on the institution’s size.
7 Conclusion
During the global financial crisis, US banks have taken an elevated level of risk and
have been engaged in an excessive lending, even to bad borrowers. This, augmented
the NPLs’ level and harmfully affected US banks, bringing about the loss and failure
of some of them. Additionally, it is to be noted that weaknesses in corporate govern-
ance were largely blamed and considered among the causes of the global financial
crisis. That is, instead of ensuring an adequate control and supervision, the corpo-
rate governance mechanisms incited banks’ directors to take excessive levels of risk.
The aim of our paper is to study the ability of banks’ corporate governance to
reduce non-performing loans of US commercial banks over the 2000–2013 period.
Taking into consideration the difference in risk profile which depends on banks’
size, we have provided a comparative analysis by dividing the full sample into three
asset size groups. For each size group, we successively integrate five corporate gov-
ernance variables in addition to the bank-specific and macroeconomic variables in
separate regressions. Indeed, the corporate governance variables are three board
13
A. Tarchouna et al.
characteristics (board size, CEO duality and board independence) and two owner-
ship structure variables (concentrated ownership and directors’ ownership). Our
findings provide evidence that the bank-specific variables significantly affect the
loan quality of the three subsamples of US banks. Additionally, our results report
that an adverse economic situation leads to an increase in non-performing loans of
US banks. Our empirical evidence indicates that the loan quality of the three sub-
samples of US commercial banks has differently been affected by board charcter-
istics and ownership structure variables. Our results have shown that the board size
and concentrated ownership variables significantly and positively affect non-per-
forming loans of small, large and the full sample of US banks but negatively influ-
ence those of medium banks. As far as CEO duality is conccerned, we find that this
variable has an adverse effect on the quality of bank loans. However, when banks
are large, this mechanism becomes more rewarding and able to reduce the conflicts
between the two leadership positions and make the process of deciding faster. Addi-
tionally, our findings indicate that an elevated number of independent directors in
the full sample of banks provide an effective control and, hence, a better quality of
loans. Moreover, we have found an insignificant effect of the ownership of directors
on the non-performing loans of large banks. On the other hand, the impact of this
variable on non-performing loans in small, medium and the full sample of banks is
negative and statistically significant.
The findings of our study could be of significant concern to policy makers as
it addresses the question of the appropriateness of corporate governance in the US
banking system. That is, our research highlights the importance of a strong corpo-
rate governance system in ameliorating lending quality. Indeed, banks’ corporate
governance can influence the economic growth and have important impacts on the
society. Accordingly, to guarantee a better loan quality, policy makers should make
sure that banks’ corporate governance is in the direction of beneficial structures.
Like any other research, our study has some limitations and can be extended in
different ways: First, rather than using an aggregate measure of non-performing
loans, we can extend our research by dividing the non-performing loans by loan cat-
egory to mortgages, business credits and consumer credits as suggested by Louzis
et al. (2012) in order to clarify the channels whereby non-performing loans fluctuate.
Second, we can extend our study by considering additional corporate governance
variables such as the audit quality or the external corporate governance mechanisms
when examining the impact of corporate governance system on non-performing
loans. Last but not least, the political connections of directors may affect their taken
decisions. Accordingly, a growing strand of literature, as Luo and Ying (2014) and
Braham et al. (2019), takes this new element into account. However, the relation
between political connections and banks’ loan quality remains not studied yet. For
this reason, future research can fill this gap by considering this novel dimension,
being the political connections of bank directors, when studying non-performing
loans factors.
13
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Publisher’s Note Springer Nature remains neutral with regard to jurisdictional claims in published
maps and institutional affiliations.
Ameni Tarchouna is a PhD in Methods of Finance and Accounting. She obtained her PhD from the Fac-
ulty of Economics and Management of Sfax, Tunisia, in 2018. She is also a member of the Research
Laboratory Governance, Finance and Accounting. Her research interest encompasses corporate finance,
financial institutions, corporate governance, bank management and banking and finance.
Bilel Jarraya is an Assistant Professor at the Institute of Advanced Business Studies of Sousse, Sousse
University, Tunisia from 2014 to 2016 and College of Business and Economics, Qassim University, King-
dom of Saudi Arabia from 2016 until now. He obtained his PhD in Methods of Finance and Account-
ing from the Faculty of Economics and Management of Sfax, Tunisia, in 2014. He is a member of the
Research Laboratory Governance, Finance and Accounting. His research interest includes corporate
finance, accounting, financial institutions, governance, bank management, banking and finance, and
algorithms.
Abdelfettah Bouri is a Full Professor of Accounting and Finance at the Faculty of Economics and
Management of Sfax, Tunisia. He is the Director of the Research Laboratory Governance, Finance and
Accounting.
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Do board characteristics and ownership structure matter for bank non-

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Do board characteristics and ownership structure matter

Ameni Tarchouna1 · Bilel Jarraya2 · Abdelfettah Bouri3

Accepted: 22 December 2020

Keywords Non-performing loans · Bank corporate governance · Board

During the global financial crisis, US banks were characterized by an elevated

governance on non-performing loans along with the bank-specific and macroeco-

2 Literature review and hypotheses development

2.1 The effect of board size on non performing loans

H1 We expect that the board size affects banks’ non-performing loans.

H1.1 We expect a positive relationship between board size and non-performing

H1.2 We expect a negative relationship between board size and non-performing

H1.3 We expect a positive relationship between board size and non-performing

2.2 The effect of board independence on non performing loans

The independence of board directors is actually an important topic in governance.

H2 We expect that the proportion of independent directors on the board affects

H2.1 We expect a positive relationship between the proportion of independent direc-

H2.2 We expect a positive relationship between the proportion of independent direc-

H2.3 We expect a positive relationship between the proportion of independent direc-

2.3 The effect of CEO duality on non performing loans

H3 We expect that the CEO duality affects banks’ non-performing loans.

H3.1 We expect a positive relationship between CEO duality and non-performing

H3.2 We expect a negative relationship between CEO duality and non-performing

H3.3 We expect a negative relationship between CEO duality and non-performing

2.4 The effect of concentrated ownership on non performing loans

H4 We expect that concentrated ownership reduces the banks’ non-performing

H4.1 We expect a positive relationship between concentrated ownership and non-

H4.2 We expect a negative relationship between concentrated ownership and non-

H4.3 We expect a positive relationship between concentrated ownership and non-

2.5 The effect of directors and executive officers’ ownership on non performing

H5 We expect that the directors’ ownership affects banks’ non-performing loans.

H5.1 We expect a negative relationship between directors’ ownership and non-per-

H5.2 We expect a negative relationship between directors’ ownership and non-per-

H5.3 We expect a positive relationship between directors’ ownership and non-per-

3.1 Dynamic panel data estimation

5.1 The dependent variable

5.2 The independent variables: corporate governance variables

5.2.5 Directors and executive officers’ ownership

ownership has a positive influence on non-performing assets of US financial

5.3 The control variables

5.3.1.3 Diversification opportunities Following Louzis et al. (2012), Alhassan et al.

5.3.2.2 Unemployment The economic situation is also reflected by the level of

6 Results and discussion

In this section, we present the correlation between bank-specific, macroeconomic

Concentrated ownership The sum of percentages Iannotta et al. (2007), She- ±

Unemployment The unemployment rate Nkusu (2011), Louzis et al. +

6.1 Correlation between variables

As presented in the correlation matrix, there is a low cross correlation between

6.2 Panel unit root tests results

6.3 Dynamic panel data estimation results

Non-performing loans − 8.57030 − 3.25240 412.034 − 12.8706 − 9.42974 622.912

Income diversification − 5.90754 − 2.86381 504.375 − 14.2051 − 11.2088 706.988

Directors’ ownership − 0.179045***

Standard Errors are reported in parentheses

**Denote significance at 5% respectively

Directors’ ownership − 0.112537*** −

Standard Errors are reported in parentheses

2 Literature review and hypotheses development

2.1 The effect of board size on non performing loans

2.2 The effect of board independence on non performing loans

2.3 The effect of CEO duality on non performing loans

2.4 The effect of concentrated ownership on non performing loans

2.5 The effect of directors and executive officers’ ownership on non performing

3.1 Dynamic panel data estimation

5.1 The dependent variable

5.2 The independent variables: corporate governance variables

5.2.5 Directors and executive officers’ ownership

5.3 The control variables

6 Results and discussion

6.1 Correlation between variables

6.2 Panel unit root tests results

6.3 Dynamic panel data estimation results