Effects of politically controlled boards on bank loan performance: an emerging economy perspective
Journal of Accounting in Emerging Economies
ISSN: 2042-1168
Article publication date: 9 August 2022
Issue publication date: 5 July 2023
Abstract
Purpose
In this study, the authors explore the effects of politically controlled boards on bank loan performance in both state-owned commercial banks (SCBs) and private sector commercial banks (PCBs) in Bangladesh.
Design/methodology/approach
The data consist of 409 bank-year observations from 46 sample SCBs and PCBs of Bangladesh for the period 2008–17. The authors apply ordinary least squares pooled regression with year fixed effect for baseline econometric analyses and generalized method of moments regression for robustness tests after addressing the endogeneity issue.
Findings
The regression results reveal that the presence of bank “boards controlled by politically affiliated directors” (PA) have significant positive effects on non-performing loans (NPLs). Similarly, the presence of “boards controlled by politically affiliated directors without substantial ownership interests” (PAWOI) show positive association with NPLs. In contrast, the presence of “boards controlled by politically affiliated directors with substantial ownership interests” (PAOI) exhibit an inverse relationship with NPLs. These findings support ‘agency conflict’ arguments and document that both PA and PAWOI are detrimental to bank loan performance in Bangladesh, while PAOI do not have significant effect on increasing NPLs.
Originality/value
This study contributes to the existing bank governance literature by providing evidence from an emerging economy perspective, where politically affiliated directors (PADs) exploit their positions for personal and/or political gain at the cost of other stakeholders by taking advantage of relaxed regulatory oversights and investor protections.
Keywords
Acknowledgements
The authors acknowledge the valuable comments provided by Professor Muhammad Moshfique Uddin, Leeds University Business School, and Dr. Faizul Haque, Southampton Business School. The authors are grateful to the associate editor, Professor Collins Ntim, and two anonymous reviewers for providing helpful guidance during the review process.
Citation
Uddin, M.M., Islam, M.T. and Al Farooque, O. (2023), "Effects of politically controlled boards on bank loan performance: an emerging economy perspective", Journal of Accounting in Emerging Economies, Vol. 13 No. 3, pp. 566-588. https://doi.org/10.1108/JAEE-11-2021-0353
Publisher
:Emerald Publishing Limited
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