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The present dissertation includes three research papers dealing with the following banking topics: (dis-) incentives and risk taking, earnings management and the regulation of supervisory boards.
„Do cooperative banks suffer from moral hazard behaviour? Evidence in the context of efficiency and risk“:
We use Granger-causality techniques to evaluate the intertemporal relationships among risk, efficiency and capital. We use two different measures of bank efficiency, i.e., cost and profit efficiency, since these measures reflect different managerial abilities. One is the ability to manage costs, and the other is the ability to maximize profits. We find that lower cost and profit efficiency Granger-cause increases in liquidity risk. We also identify that credit risk negatively Granger-causes cost and profit efficiency. Most importantly, our results show a positive relationship between capital and credit risk, thus displaying that moral hazard (due to limited liability and deposit insurance) does not apply to our sample of cooperative banks. On the contrary, we find evidence that banks with low capital are able to improve their loan quality in subsequent periods. These findings may be important to regulators, who should consider banks’ business models when introducing new regulatory capital constraints.
„Earnings Management Modelling in the Banking Industry – Evaluating valuable approaches“:
Accounting research has separately studied the field of Earnings Management (EM) for non-financial and financial industries. Since EM cannot be observed directly, it is important for every research question in any setting to find a verifiable proxy for EM. However, we still lack a thorough understanding of what regressors can add value to the estimation process of EM in banks. This study tries to close this gap and analyses existing model specifications of discretionary loan loss provisions (LLP) in the banking sector to identify common pattern groups and specific patterns used. Thereupon, we use an US-dataset from 2005-2015 and apply prevalent test procedures to examine the extent of measurement errors, extreme performance and omitted-variable biases and predictive power of the discretionary proxies of each of the models. Our results indicate that a thorough understanding about the methodological modelling process of EM in the banking industry is important. The currently established models to estimate EM are appropriate yet optimizable. In particular, we identify non-performing asset patterns as the most important group, while loan loss allowances and net charge offs can add some value, though do not seem to be indispensable. In addition, our results show that non-linearity of certain regressors can be an issue, which should be addressed in future research, while we identify some omitted and possibly correlated variables that might add value to specifications in identifying non-discretionary LLP. Results also indicate that a dynamic model and endogeneity robust estimation approach is not necessarily linked to better prediction power.
„Board Regulation and its Impact on Composition and Effects – Evidence from German Cooperative Bank“:
This study employs a system GMM framework to examine the impact of potential regulatory intervention regarding the occupations of supervisory board members in cooperative banks. To achieve insights the study proceeds in two different ways. First, the author investigates the changes in board structure prior and following to the German Act to Strengthen Financial Market and Insurance Supervision (FinVAG). Second, the author estimates the influence of Ph.D. degree holders and occupational concentration on bank-risk changes in consideration of the implementation of FinVAG. Therefore, the sample consists of 246 German cooperative banks from 2006-2011. Regarding bank-risk the author applies four different measures: credit-, equity-, liquidity-risk and the Z-Score, with the former three also being addressed in FinVAG. Results indicate that the implementation of FinVAG results in structural changes in board composition, especially at the expense of farmers. In addition, the implementation affects all risk-measures and relations between risk-measures and supervisory board characteristics in a risk-reducing and therefore intended way.
To disentangle the complex relationship between board characteristics and risk measures the study utilizes a two-step system GMM estimator to account for unobserved heterogeneity, and simultaneity in order to reduce endogeneity problems. The findings may be especially relevant for stakeholders, regulators, supervisors and managers.
One primary source for self-knowledge is social comparison. Often objective criteria for self-evaluations are not available or useful and therefore comparisons with other people play a crucial role in self-evaluations. But the question is whether social comparisons could indeed provide information about the self without consuming too much cognitive resources or time. Therefore, in this research I wanted to look at practice effects in social comparison and the particular significance of routine standards. Whereas traditional research on standard selection mostly focused on goal-oriented and strategic standard selection processes, this research sets out to integrate social cognitive knowledge, ideas, and methods. Researchers from many different fields agree that people’s behavior and thinking is not fully determined by rational choices or normative considerations. Quite the contrary, factors like knowledge accessibility, habits, procedural practice, stereotyping, categorization, and many more cognitive processes play an important role. The same may be true in social comparison and standard selection. In my research I demonstrate that efficiency concerns play an important role in social comparison. Since people may not be able to engage in a strategic standard selection whenever they engage in social comparison processes, there has to be a more efficient alternative. Using routine standards would be such an alternative. The efficiency advantage of routine standards may thereby be founded not only in the abandonment of a strategic but arduous standard selection process, but also in a higher efficiency of the comparison process itself. I therefore set out to show how the use of routine standards facilitates the social comparison processes. This was done in three steps. First, I replicated and improved our former research (Mussweiler & Rüter, 2003, JPSP) indicating that people really do use their best friends as routine standards to evaluate themselves. Second, I demonstrated that it is more efficient to compare with a routine standard than with another standard. In Studies 2 and 3 I therefore show that comparisons between the self and a routine standard (either a natural routine standard like the best friend or a experimentally induced routine standard based on practice) are faster and more efficient than comparisons with other standards. Finally, I looked at the underlying mechanism of the efficiency advantage of routine standards. The results of Studies 4 and 5 point out, that both general as well as specific practice effects occur with repeated comparisons. Whereas a specific practice effect implies the repeated processing of the same content (i.e., knowledge about the routine standard), general practice effects indicate that the pure process (i.e., comparing the self with a routine standard) becomes more efficient regardless whether new content (i.e., comparison relevant knowledge) has to be processed. Taken together, the efficiency advantage of routine standards during self-evaluation is based not only on the lack of necessity for an arduous standard selection, but is additionally supported by the facilitation of the comparison process itself. The efficiency of routine standards may provide an explanation as to why people base self-evaluations on comparisons with these standards and dispense with strategic considerations to select the most suitable standard.