288 W.G. Simpson, A.E. Gleason International Review of Economics and Finance 8 1999 281–292
3. the risk evaluation of the equity markets measured by the market valuebook value ratio, and
4. financial leverage measured by the book value of equity to book value of total assets ratio.
The number of control variables was parsimonious by design but the equations show that most of the variables had high explanatory power.
The calculation of the governance structure variables was straightforward except for the percentage of insiders on the board. A strict definition of insiders was applied
which included current officers of the banking firm, former officers of the banking firm, and corporate counsel. Board members were considered insiders only if it was
obvious from the proxy statements.
Table 1 provides a list of all empirical variables with descriptive statistics and the expected sign of the regression coefficients. The banks with publicly traded stock are
much larger than the average bank as indicated by the average total assets of 1.714 billion for the sample banking firms. All of the firms in the sample were bank holding
companies.
5. Empirical results
5.1. Tests of hypotheses The maximum likelihood estimates of the ordered logistic regression parameters
reported in Table 2 reveal that the null hypothesis was rejected for Hypothesis IV but could not be rejected in the other relationships. The parameter estimate indicates
that CEO duality i.e., when the same person is both the CEO and chairman of the board has a significant effect on the future probability of financial distress in a banking
firm. The regression coefficient b
for Hypothesis IV is positive which indicates that banking firms where the same person is both the CEO and chairman of the board
have a lower probability of financial distress five years later. This result is consistent with the theory that a dual CEO-chairman of the board is more likely to have the
ability to pursue hisher personal interests and is less likely to be aligned with the interests of shareholders who prefer greater risk taking by the firm.
The regression estimates give no indication that ownership is an important influence on the probability of financial distress in the future. The combined equity ownership
of directors and officers and the individual equity ownership of the CEO did not have an effect. The percentage of insiders on the board and the number of directors on
the board does not appear to impact future financial distress.
4
The relative magnitudes of the standardized regression coefficients suggest that the governance variables are less important influences on risk than the control variables
representing bank size, the riskiness of the loan portfolio, and the banking firm’s use of financial leverage.
5.2. Explanatory power of the equations. The signs of all significant regression coefficients were correct and all of the control
variables were highly significant except the market value to book value ratio. The 22
W.G. Simpson, A.E. Gleason International Review of Economics and Finance 8 1999 281–292 289
Table 2 Maximum likelihood estimates of the ordered logistic equation parameters
Parameters Hypothesis I
Hypothesis II Hypothesis III
Hypothesis IV Hypothesis V
a constant
17.7050 19.6892
18.7043 21.2958
18.7223 0.00
0.00 0.00
0.00 0.00
b GOV
1i
2 management
0.0141 and board equity owner-
[0.1094] ship
0.37 b
GOV
2i
2 board size
0.0575 [0.1831]
0.19 b
GOV
3i
2 insiders on
0.0207 the board
[0.1160] 0.38
b GOV
4i
2 CEO duality
1.4010 [0.3833]
0.01 b
GOV
5i
2 CEO owner-
0.0400 ship of equity
[0.1512] 0.19
b
1
X
1i
2 book value
2 0.8544
2 1.0168
2 0.9196
2 1.1083
2 0.9062
total assets [20.7777]
[20.9254] [20.8370]
[21.0088] [20.8248]
0.00 0.00
0.00 0.00
0.00 b
2
X
2i
2 nonperforming
0.9193 0.9215
0.9338 0.9852
0.9219 assetstotal assets
[1.1785] [1.8184]
[1.1971] [1.2631]
[1.1819] 0.00
0.00 0.00
0.00 0.00
b
3
X
3i
2 market value per
0.3415 0.3308
0.2899 0.2331
0.3016 sharebook value per
[0.2454] [0.2377]
[0.2084] [0.1676]
[0.2167] share
0.39 0.41
0.56 0.67
0.55 b
4
X
4i
2 book value of
2 1.3247
2 1.3551
2 1.3392
2 1.3992
2 1.3418
total equity capital [21.2145]
[21.2424] [21.2278]
[21.2828] [21.2302]
total assets 0.00
0.00 0.00
0.00 0.00
Standardized regression coefficients are in brackets. Probabilities for a Wald Chi-square test are in parentheses.
log likelihood statistic which is distributed as a chi-square distribution was used to test the null hypothesis that all regression coefficients in the equation are zero. The
results reported in Table 3 confirm that the null hypothesis was rejected. The explanatory power of the equations as revealed by the R-square statistics
was solid with generalized R-square statistics of approximately 0.55 and adjusted generalized R-statistics of approximately 0.76.
5
The predicted probabilities and ob- served responses indicate the model was correct in approximately 85 percent of the
cases, incorrect in approximately 2 percent of the cases, and indeterminate in approxi- mately 13 percent of the cases. The Sommers’ D, which is a summary measure of the
predicted probabilities and observed responses, indicates good explanatory power.
The Chi-square test for the proportional odds assumption indicates the computation
290 W.G. Simpson, A.E. Gleason International Review of Economics and Finance 8 1999 281–292 Table 3
Statistics for the ordered logistic equations Statistics
Hypothesis I Hypothesis II Hypothesis III Hypothesis IV Hypothesis V Generalized R-square
0.551 0.552
0.551 0.561
0.552 Adjusted generalized
0.755 0.757
0.755 0.769
0.757 R-square
Proportional odds [14.100]
[13.654] [14.800]
[12.858] [13.007]
assumption Chi- 0.1685
0.1894 0.140
0.232 0.223
square test
a
2 2 log likelihood
[229.725] [230.512]
[229.636] [230.445]
[236.272] Chi-square test
a
0.000 0.000
0.000 0.000
0.000 Predicted probabili-
84.5 86.1
84.5 86.2
84.5 ties and observed
responses: Concordant Predicted probabili-
2.3 2.1
2.2 1.9
2.2 ties and observed
responses: Discordant Predicted probabili-
13.2 11.7
13.4 11.9
13.3 ties and observed
responses: Tied Sommers’ D
0.822 0.840
0.823 0.843
0.823
a
The Chi-square statistic is in brackets and the probability is in parentheses.
that assumed a common slope parameter for each explanatory variable was reasonable, that is, the null hypothesis of common slope parameters could not be rejected at a
normal level of confidence.
6. Conclusion
