Corporate governance and default probability: The moderating role of bank’s efficiency

Figures & data

Figure 1. Theoretical framework.

Table 1. Descriptive statistics

Variables	Obs	Mean	Std. Dev.	Min	Max
Default Probability Index (DPI)	189	1.578	1.612	−3.871	5.322
Corporate Governance (CG)	189	2.635	0.825	1.000	4.000
Banking Efficiency Index (BEI)	189	0.000	1.000	−2.684	6.894
CG*BEI	189	0.027	3.120	−10.738	20.683
Capital Advocacy Ratio (CAR)	189	0.240	1.038	−0.022	12.64
Liquidity Risk (LR)	189	1.316	1.484	−5.117	4.432
Risk Taking Practicing (RTP)	189	0.889	0.100	0.036	.984
Bank Size (BS)	189	2.152	0.189	1.792	2.639

Table 2. Correlation analysis of variables

Variables	(DPI)	(CG)	(BEI)	(CG*BEI)	(CAR)	(LR)	(RTP)	(BS)
DPI	1.000
CG	.158**	1.000
BEI	.279***	0.033	1.000
CG*BEI	.267***	0.034	0.483***	1.000
CAR	−.035	−0.035	−0.008	−0.009	1.000
LR	.005	−0.120*	0.047	0.041	−0.055	1.000
RTP	−.019**	0.072	−0.032**	−0.014	−0.011*	0.083	1.000
BS	.064*	−0.091	0.139*	0.143*	−0.004	0.267***	.006	1.000

*** p<0.01, ** p<0.05, * p<0.1

Table 3. Variance inflation factor

Variable	VIF	1/VIF
CG	1.030	0.971
BEI	1.608	0.621
CG*BEI	1.609	0.622
CAR	1.005	0.995
LR	1.103	0.906
RTP	1.026	0.975
BS	1.104	0.906
Mean VIF	1.201	.

Table 4. Results of System GMM and D-K regression

	(1)	(2)
Dep. Variables	DFI	DFI
	Main Model	Robust
L. DFI (ZScore)	0.697***
	(0.019)
Corporate Governance (CG)	0.271**	0.219***
	(0.083)	(0.024)
Banking Efficiency (BE)	−0.145*	−0.130**
	(0.037)	(0.031)
CG*BE	1.345**	0.570*
	(0.137)	(0.098)
Capital Advocacy Ratio (CAR)	−0.300	−0.267
	(0.177)	(0.128)
Liquidity Risk	0.053**	0.032*
	(0.084)	(0.069)
Risk-taking	−0.224*	−0.241**
	(0.091)	(0.102)
Bank Size	−0.165***	0.194
	(0.051)	(0.087)
I.year	Yes	Yes
Observations	168	189
Number of Banks	21	21
AR1	−1.116
AR1p-value	0.026
AR2	−9.752
AR2p-value	0.452
Sargan test	128.5
Hansen test	45.675
Hansen p-value	0.168
j-stat	14
Chi2 -Wald Test	1729
Chi2-p value	0
R-squared		0.730
Prob > F		0.000

Table 4.3 shows the results ***, ** and * show significance at 1%, 5% and 10% standard errors are reported in parentheses.

Table

List Of Sample Banks
Sr. No	Bank Name	Sr. No	Bank Name
1	Allied Bank Limited	12	KASB bank
2	Albaraka Bank Limited	13	Muslim commercial bank (MCB)
3	Askari Bank Limited	14	Meezan Bank
4	Bank Al-Habib	15	National bank of Pakistan (NBP)
5	Bank Alfalah Limited	16	NIB
6	Bank Islami	17	Silk Bank Limited (Saudi Pak Commercial Bank Limited)
7	Bank of Khyber	18	Soneri Bank Limited
8	Bank of Punjab	19	Standard Chartered
9	Faysal Bank Limited	20	Summit Bank
10	Habib Bank Limited	21	United bank Limited (UBL)
11	JS bank

Table B1. The Corporate Governance Variables

Measures of Corporate Governance
Group	Indicators (Measurement)	Explanation (If needed)
Corporate Governance Index	Board independence	Percentage of outside directors on the board per bank, Dummy variable: 0 if less than 60% of directors are independent and 1 if 60% or more directors are independent.
	CEO is chairman/duality	Chairman same as CEO, if not any lead director per bank. When the CEO is also the chairperson of the board, it is known as CEO duality; Dummy variable: 0 if the CEO is a chairperson of the board and 1 if the CEO is not the chairperson of the board.
	Board size/board of directors	Total number of directors per bank, Dummy variable: 0 if greater than the median of the sample and 1 if less than the median of the sample.
	Transparency	When the bank publishes its financial statements quarterly, semi-annually, and annually, Dummy Variable: 0 if financial statements are not published and 1 if financial statements are published.
	Managerial ownership for internal control	Percentage of shares held by intellectual capital (executive director and senior management) divided by the total number of shares per bank, Dummy Variable: 1 if percentage is less than the sample median and 0 if percentage is greater than the sample median.

Table B2. The efficiency/profitability variables

To measure efficiency and profitability (here we use some profitability variables also because ROA and ROE are linked with banks’ effectiveness and can cause bank default)
Group	Indicators (Measurement)	Explanation (If needed)
Profit Efficiency	Profit after tax to TA	Profit After Tax/Total assets
Operational Efficiency	Non-interest expenses/net bank revenue	Net bank revenue = interest income + other income-interest expenses.
Management Efficiency	Earnings per share (EPS)	We considered the banks’ earnings per share, which is a proxy for the bank’s management efficiency and the bank’s earnings and market share.
Banks’ cost efficiency	Total assets (input)/total loans and the growing non-lending activities (other earning assets) (Output) TA to NPL+ TA or TL	Total costs (personnel expenses + other administrative expenses + interest paid + non-interest expenses) total Assets/NPL+ total advances or total loan
Technical efficiency	Input/output	Inputs are no of employees,no of branchesadmin expenses, non-interest expense and loan loss provision. Outputs are net interest income,net commission, and total other income.

Table B3. The bank default probability and financial soundness

To measure bank default probability and financial risk soundness index
Group	Indicators (Measurement)	Explanation (If needed)
To measure the bank’s default probability Z-score model	Z= (ROA+E/A) banks Sd. of ROA	E/A is its equity-to-asset ratio
Liquidity risk and risk-taking practices (RTP) proxied by total loan to total assets.	proxied by total advance to total deposit
Risk-taking practices	RTP proxied by total loan to total assets.
Bank Size	Log of total assets
CAR	Capital adequacy ratio: the ratio of capital to risk-weighted assets (credit, operational, market).