“Comment on Corporate Governance and
Risk Management at Unprotected Banks:
National Banks in the 1980s”
Authors: Charles W. Calomiris and Mark
Carlson
Discussant: Joseph A. McCahery
GCCG Conference, Palo Alto
June 5, 2015
1. Objectives of the Paper
Examines: how banks design governance structures and risk
management mechanisms to limit agency problems in order
to attract investors.
Key contributions:
 Differences in level of ownership v. governance
mechanisms to resolve conflicts.
 Impact of more concentrated ownership  less formal
governance, less risk taking but more related loans,
dividend payments & reliance on more cash to resolve
adverse selection problems.
 Governance approach more risk taking via reliance on
capital for risk management and lower managerial salaries.
 Cash as strategy to signal effective risk management
1. Contribution of the Paper
Paper focuses on sample of 206 banks, which consists of national banks in 37 cities
that provided information for September 1982 Call Report and at least one
Examination Report prior to 1893.
Unique approach: use of Examination Reports that includes data on extent of
ownership holdings of management and board, corporate governance practices,
salaries of officers, number of shares held and loans to these individuals, as well as
information about the loan book, collateral, bank liabilities and performance.
The paper contributes to the literature on how ownership and corporate
governance structures influences insider lending and who receives insider loans.
Paper relates to the literature on how managerial ownership and executive
compensation sensitivity to firm performance matters for risk taking.
 Offers insight by showing the expansion of too-big-to-fail protection that is
associated with a significant decline in banks’ holdings of cash assets and contrasts
with historical banks’ reliance on cash as a credibly strategy to signal an effective
risk management system.
2. Comments (C1)
Unaddressed endogeneity
 It is difficult to understand what is exogenous and what is endogenous. In
particular, managerial ownership is one corporate governance mechanism as
much as board structure.
As the author’s acknowledge, it is hard to say that one determines the other.
Both are the outcome of something else. We all know that family firms (which
seem very similar to the historical manager/controlled banks) have worse
board practices.
2. Comment (C2)
Is the Manager the Controlling Shareholder?
It is key to know who is the controlling shareholder and its
connection to management since it would be hard to argue that
managerial ownership is a good corporate governance mechanism
if the manager is the controlling shareholder.
The connection between the controlling shareholder and the
manager is also important to determine how resources would be
tunneled out:
1. If the manager is the controlling shareholder, then tunneling
would be done by self loans or
2. If the manager is not the controlling shareholder, then he will
increase his salary as a way to tunnel assets.
2. Comment (C3)
• Managerial Turnover: is the instrument used in Table 6.
There are questions about whether this is a good
instrument since it does not meet the requirement in many
cases.
• Also, there is only evidence for 37 cases, which is less than
half of the data set.
• It is hard to be confident about the instrument unless we
know about the other half of the CEOs that died and the
connections between the manager and controlling
shareholder.
• Prior literature indicates that if a firm has a large controlling
shareholder, then he will typically run the firm (70% of
firms) (LLS 1999; Levine 2004).
2. Comment (C4)
• IV Variables
• Table 6 shows that there is a weak correlation
between the instrument Z variables and the X
variables.
• Problem due to choice of IV variables Z
(resulting from omitted variable bias).
3. Suggestions
• Controlling Shareholder
• It may be worth finding out about the other
half of the CEOs that died and the connections
between the managers and controlling
shareholders in those cases.
Take Away
• Very interesting paper
--From a corporate law and finance perspective, this seems
like a very interesting avenue for research.
• Attempt to find out about the other half of
the CEOs that died and their connections to
controlling owners
• Consider adjustments to IV variables Z