Short- and long-term effects of corporate governance on banks' performance and stability: An investigation for 27 developed economies
Short- and long-term effects of corporate governance on banks' performance and stability: An investigation for 27 developed economies

Summary/Abstract: Research background: The banking sector plays a vital role in maintaining global economic stability, making corporate governance (CG) a crucial mechanism for mitigating systemic risk. Although the relationship between board structures and firm performance has been extensively examined, the specific impact of CG on banking institutions remains insufficiently understood, particularly given the sector's unique regulatory environment. Moreover, previous studies rarely distinguish between short-term and long-term governance effects, resulting in a limited understanding of how qualitative board characteristics shape bank outcomes over time. Purpose of the article: This study investigates the short-term and long-term effects of board characteristics on bank performance and financial stability. The analysis covers 409 banks from 27 developed countries over the period 2001-2023, capturing substantial variation in governance systems and institutional contexts. Methods: Bank performance is assessed using Return on Assets (ROA) and Return on Equity (ROE), while financial stability is measured with the Z-score, which reflects the distance to default. Corporate governance attributes--including board size, experience, skills, gender diversity, and independence--are operationalized through detailed board composition metrics. The empirical analysis employs Feasible Generalized Least Squares (FGLS) to correct for heteroscedasticity, supplemented by the two-step System Generalized Method of Moments (GMM) to address potential endogeneity and the dynamic persistence of bank performance. Findings & value added: Managerial experience and gender diversity are found to enhance bank profitability and stability in both the short and long term. While board independence exerts a significant positive effect on performance in the long run, larger boards negatively influence profitability over the same horizon. In contrast, board skills show a positive short-term association exclusively with bank stability. The paper's main theoretical contribution lies in demonstrating that the effects of corporate governance in the banking sector are not static but strongly horizon-dependent, and that governance mechanisms influence profitability and resilience through distinct pathways. The practical and policy implications suggest that effective board structure should be regarded as a long-term component of prudential governance. Regulators and bank stakeholders can enhance institutional resilience and reduce systemic vulnerability by promoting managerial experience, gender diversity, and well-designed board independence--rather than focusing solely on formal compliance with governance codes.

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