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Financial crises, natural selection and governance structure:
Evidence from the thrift crisis
John W. Byrda
Donald R. Fraserb*
D. Scott Leeb
Thomas G.E. Williamsc
a
Department of Biology, Fort Lewis College, Durango, CO 81301
Mays College of Business, Texas A&M University, College Station, TX 77843-4218
c
College of Business, William Patterson University, Wayne, NJ 07470
b
Abstract
We exploit the natural experiment provided by the thrift crisis of the 1980s to
examine the influence of governance structure on firm survival. Using a sample
of 86 publicly-traded thrifts, we show that a firm’s probability of surviving this
economic crisis was enhanced by internal governance arrangements that aligned
the interests of managers and shareholders. Firms that survived the crisis had a
greater proportion of independent directors on the board. In addition, our
evidence challenges the notion that affiliated directors help firms adapt to a more
competitive business environment.
JEL classification: G34, G32, G33, G21
Comments welcomed.
*Corresponding author. Tel.: + 1-979-845-2020; fax: + 1-979-845-3884
E-mail address: [email protected]
We thank Beth Cooperman, Jon Karpoff, and participants in seminars at Texas
A&M University and the University of Oregon for their helpful comments. Lee
thanks the Private Enterprise Research Center for financial support.
1. Introduction
Financial economists often draw parallels between corporate governance and
Charles Darwin’s principle of biological evolution by natural selection. Firms are
generally assumed to survive or fail because of the relative superiority or inferiority of
their operating, financial, or governance characteristics. Walter Bagehot, editor of The
Economist, drew the parallel between firm and species survival within a decade of
Darwin’s 1859 publication of On the Origin of the Species.1 The notion spread rapidly
and, in 1889, famed industrialist Andrew Carnegie wrote that while “the law [of
competition] may be sometimes hard for the individual, it is best for the race, because it
insures the survival of the fittest in every department.”2
In fact, Darwin credited two economists, Thomas Malthus and Adam Smith, with
crucially influencing the formulation of his theory. Malthus’ insight that unchecked
population growth would outrun any increase in food supply, led Darwin to conclude that
a struggle for existence must arise, leading by natural selection to survival of the fittest.
While Smith’s discussions of laissez-faire economics and the invisible hand echo
throughout Darwin’s discourses on evolution.3
Kole and Lehn (1997) contrast the ubiquity of the notion of corporate evolution in
the economic literature with the relative scarcity of supporting evidence and challenge
researchers with an extensive list of unanswered questions about evolution and
1
Walter Bagehot, “Physics and politics: or, thoughts on the application of the principles of ‘natural
selection’ and ‘inheritance’ to political society,” D. Appleton & Co., NY.
2 Andrew Carnegie, “Wealth,” North American Review, June 1889.
3 Stephen Jay Gould, “Darwin and Paley Meet the Invisible Hand,” in Eight Little Piggies, pp. 138-152.
1
governance structures. In this paper, we address one of these questions: is the long-run
survival of firms related to their internal governance choices.
In his study of firm survival and capital structure, Zingales (1998) notes that the
appeal of natural experiments lies in “the external origin and unforeseen severity of abrupt
shifts in an industry’s competitive environment.” These shifts allow us rare glimpses of
firm characteristics related to the firm’s survival through dire times. From the biological
perspective:
“species live or die for definite and specifiable reasons… in normal times
between mass extinctions, organisms evolve features to enhance success in
continuous ecological struggle. The cause of mass extinction then hits in all
its fury. Certain features are the passkeys to survival – tolerance of extreme
climatic stress, for example. But these features must have evolved during
normal times… for reasons unrelated to their later (and lucky) use in guiding
their possessors through the unanticipated debacle of mass extinction.”4
If we could not anticipate debacles these “passkeys to survival” would indicate only
dumb luck. However, humans, owing to intelligence, operate within the realm of cultural
evolution.5 Thus, we have the ability to adapt to and even anticipate environmental
changes. Therefore, prudence as well as luck, may be evident in the attributes of firms
that survive crises.
Previous studies of economic shocks include Mitchell and Mulherin (1996) who
conclude that the “takeover wave of the 1980s entails an adaptation of industry structure
to a changing economy.” Kole and Lehn (1999) study the impact of the Airline
Deregulation Act of 1978 on the airline industry. They conclude that the internal
4
Stephen Jay Gould, “The Wheel of Fortune and the Wedge of Progress,” Eight Little Piggies, page 307.
2
governance structures of incumbent firms evolve sluggishly because employees (with their
finite planning horizons) are generally more committed to the preservation of the firm’s
endangered culture than they are to the firm’s long-term survival.6 Yet, they show that the
industry survived despite the failure of individual firms to adapt because new entrants
(unimpeded by cultural precedents) quickly fill the niche created by the uncompetitive
incumbents.
This highlights an important and sometimes misunderstood parallel between firm
survival and Darwin’s concept of natural selection. Evolution is driven by the survival of
the species, not the adaptation of individuals. Thus, our analysis focuses strictly on the
differences between the governance attributes of thrifts that failed and those of that did not
fail in the face of the crisis. Kole and Lehn compare the governance characteristics of
airlines that did and did not survive deregulation, but they are handicapped by a small
sample (six survivors and 15 non-survivors).
Zingales (1998) studies the trucking industry following the passage of the Motor
Carrier Act of 1980. He finds that firms with relatively low financial leverage before
deregulation (whom he dubs the “fattest”) were more likely to survive deregulation.
Zingales provides a meticulous analysis and lucid insights into the costs of financial
leverage associated with shocks to the competitive environment. However, in our
opinion, his conclusion that his “findings challenge the commonly held assumption that
5
Stephen Jay Gould, “Shades of Lamarck,” in The Panda’s Thumb, pp. 76-84.
Societal resistance to even the most inevitable change exacerbates the inertia of corporate culture. The
experience of General Dynamics following the end of the Cold War illustrates the difficulty that executives
confront in attempting to adapt to economic shocks. Executives hired to undertake the unpleasant business
of paring down the firm were lambasted by the popular and business press [Dial and Murphy (1995)].
6
3
competition will necessarily lead to the survival of the fittest” is mistakenly based on
fitness and fatness standards made obsolete by the shock of deregulation.
We study a natural experiment provided by the thrift (savings & loan) crisis of the
1980s. It offers at least five advantages for studying internal governance configurations.
First, focusing on a single industry eliminates the need to control for inter-industry
differences. Second, focusing on the thrift industry minimizes the substitution effect
between internal and external control mechanisms. Third, the concentration of the firm
failures in time reduces the influence of intertemporal changes in economic conditions.7
Fourth, the sheer number of failures in the thrift industry during this period enhances the
robustness of our statistical tests. Fifth and possibly foremost, crises are more likely to
reveal the relative merits and costs of alternative governance systems that remain
concealed during prolonged periods of prosperity. For example, if their primary
governance role is supervisory, independent directors may be functionally comparable to
automobile airbags. Their importance is difficult to detect on normal days, but it may
still be optimal to install them even if crises occur infrequently.
Using a sample of 26 failed and 60 non-failed publicly-traded thrifts during the
period 1983-1990, we find that relative to their failed counterparts, the typical thrift that
survived the crisis had a smaller percentage of affiliated board members and a greater
percentage of independent board members.
To our knowledge, our evidence of an inverse relation between the percentages of
affiliated directors and thrift survival is the first of its kind. It is inconsistent with prior
7
The sample failures are restricted to a 5-year span and 96% occurred within 4-years.
4
conclusions that affiliated directors provide a valuable advisory role to the firms they
direct (Klein, 1998) and thereby, casts doubt on the role of affiliated directors on the
board. The direct relation between director independence and thrift survival corroborates
evidence from other studies that shareholders fare better during significant corporate
events, such as acquisitions (Byrd and Hickman, 1992, Cotter, Shivdasani and Zenner,
1997), poison pill adoption (Brickley, Coles and Terry, 1994), and corporate restructuring
(Perry and Shivdasani, 2000), when their firm’s board is dominated by independent
outside directors.
Overall, these results broaden our understanding of the corporate events influenced
by internal governance schemes and contribute to our understanding of the thrift crisis. In
addition, our detection of systematic differences in the governance systems of firms that
did and did not survive this industry-wide shock is consistent with the view that a
competitive economic environment imposes a form of natural selection on the corporate
entities operating within it and that the industry adapts to the change even though many
individual thrifts fail.
The remainder of the paper is structured as follows: Section 2 discusses the savings
and loan crisis of the 1980s and the implications of that crisis for risk-taking. Section 3
introduces our hypotheses and testable implications. Section 4 describes our sample
selection procedure and provides a statistical profile of the sample. We report the results
of our analysis in section 5 and close with our conclusions in Section 6.
5
2.
The Thrift Crisis
The endogenous nature of governance choices makes it difficult to determine
whether product market competition affects governance choices or if a firm’s governance
structure affects its competitive position and, eventually, its survival. Following Kole
and Lehn (1999) and Zingales (1998), we address this problem by studying a natural
experiment that profoundly shocked the competitive structure of an industry.
Before the crisis, the only source of external discipline on thrift managers came
from industry regulators. Regulations constrained manager’s operational activities to
attracting local deposits and lending in the local home mortgage market. Regulated
ceilings on deposit rates prevented rate-based competition for deposits and led to such
farcical practices as offering toasters for new accounts. Thus, it is difficult to imagine
that managers were subject to any discipline from the product market, and lending in the
virtually default-free, mortgage environment did little to hone their discretionary skills.
In fact, perceptions of the operating skills of thrift managers lead to an adage that they
followed the rule of 3-6-3 (borrow at 3%, lend at 6%, golf at 3). In this highly regulated
setting, fraternizing with the well-heeled members of the local country club may have
been the thrift manager’s most effective means of competing for local deposits and loans.
Effective barriers to entry from external competition were created by charter
requirements and the market for corporate control was stifled by requirements for federal
approval of mergers and acquisitions. In sum, thrift managers were so insulated from
external discipline before the crisis that internal governance mechanisms were the only
conceivable source of managerial discipline at hand.
6
When interest rates began to fluctuate in the late 1970s, thrift depositors withdrew
funds for deposit into money market funds when interest rates rose, and they rushed back
to the thrifts when interest rates fell. Hamstrung by regulation and their long-term
commitments in mortgage loans, thrift managers were unable to respond. Interest rate risk
escalated to new levels in 1979 as oil prices doubled and the inflation rate surged into
double digits. Government policymakers responded in the early 1980’s with the
Depository Institutions Deregulation and Monetary Control Act (1980) and the Garn-St
Germain Act (1982). These acts freed thrift managers to offer rates for deposits that
competed with money market mutual funds. They also freed thrifts to offer consumer
loans, commercial loans, and adjustable rate mortgages. This unprecedented deposit
pricing and lending authority provided thrift managers a double-edged sword whose other
edge was unprecedented exposure to credit risk. Moreover, during this period regulators
exercised official forbearance toward troubled institutions, effectively condoning creative,
regulatory accounting practices designed to mask an institution’s insolvency.8
Roused by this sudden liberalization, managers of incumbent and new thrifts
generated a 50% increase in industry assets between 1982 and 1985. However, this
indiscriminant growth coupled with the interest rate risk problem of the early 1980s led to
a credit crisis in the mid 1980s.9 Contributing factors included the Tax Reform Act of
1986, which led to a decline in the value of commercial real estate collateral on property
loans to which thrifts had become heavily committed. The concurrent collapse of oil
8
A recent study by the Federal Deposit Insurance Corporation (An Examination of the Banking Crisis of
the 1980s and 1990s, Vol. 1, p. 70) reports that the thrift examination process and staff were not designed
to deal with the new powers provided to the industry through deregulation. Moreover, White (1991) shows
that the number of thrift field examiners was actually reduced in the early 1980s and that the number of onsite examinations (audits) also declined.
7
prices in energy states such as Texas compounded problems for specialized real estate
lenders. As thrifts plunged into undercapitalization, managers’ incentives for risk taking
grew and were amplified by the appeal of deposit insurance [Gorton and Rosen (1995)].
Akerlof and Romer (1993) argue that regulatory laxity created incentives for manager –
owners at undercapitalized thrifts to engage in looting through high compensation and
dividends.
Thus, the 1980s presented an immensely challenging environment to thrift
managers. During the first half of the decade, the unprecedented freedom to modify
portfolios often resulted in dramatic changes in exposure to credit and interest rate risk.
Like Darwin’s proverbial finches, thrifts proliferated during these times of plenty,
“however, the gold rush had a dark side. The record number of eggs, led to a record
number of deaths.”10 From 1986 through 1995 (the period we study), the number of
federally-insured thrifts roughly halved, declining from 3,234 to 1,645 (Curry and Shibut,
2000). The extent to which internal governance is related to the ultimate success or failure
of the thrifts during this abrupt shift is the focus of the remaining portions of this paper.
3. Hypotheses and testable implications
3.1. The competing hypotheses
We address two related questions. First, does corporate governance affect a firm's
ability to survive changes in the competitive environment? Second, if corporate
governance matters, which aspects appear to matter most?
9
Benston (1985), Kane (1989), and White (1991) provide a more extensive analysis of the thrift crisis.
Jonathan Weiner, “The Beak of the Finch,” page 102.
10
8
If a firm's corporate governance is irrelevant, then we should detect no systematic
differences in the governance configuration of firms that survive versus firms that fail in
an industry consolidation. Alternatively, a firm’s governance configuration may influence
its ability to survive an industry consolidation either positively or negatively. Some
governance configurations may lend themselves to more cultural commitment or a
reticence to change. Such reticence might prevent managers from adjusting to
environmental changes and eventually end in their firm’s demise. Other governance
configurations may encourage adaptation to or anticipation of changing environments.
Such a capacity should improve a firm’s likelihood of survival during an industry
consolidation.
The rapid changes in the thrift industry during the early 1980s created a business
environment for which many managers were unprepared. Particularly problematic were
the opportunities and incentives for thrifts to aggressively pursue risky assets. The
relative immunity that thrift managers enjoyed from external threats made the internal
governance mechanisms of thrifts crucial. We turn now to a discussion of specific testable
implications of the internal governance hypotheses and existing evidence relating the
effectiveness of each characteristic.
3.2. Board composition
Board of director approval is one of the first hurdles that corporate level decisions
must clear. The board can help managers better understand changing markets as well as
assess and approve a company’s strategic direction. Thus, active board oversight can
improve decision quality and may prevent poor decisions from being implemented.
9
3.2a. The monitoring role of independent directors
Directors often are placed in one of three categories: inside (i.e., current and
former officers of the company and their family members), affiliated outside or gray
directors (i.e., not an employee but with some professional or financial tie to the
company), and independent or outside directors (i.e., those with no link to the company
other than their directorship). Previous research provides results consistent with
independent outside directors defending the interests of shareholders. Byrd and Hickman
(1992) studying bidders in acquisitions, Cotter, Shivdasani and Zenner (1997) studying the
targets, and Brickley, Coles and Terry (1994) examining poison pill adoptions, all find
higher event date abnormal stock returns for firms with higher percentages of independent
directors. Rosenstein and Wyatt (1990) detect a positive stock price response to
announcements of independent directors being added to a board. Weisbach (1988) shows
that boards comprised largely of outside directors tend to confront poor performing
managers earlier than other boards. Brickley and James (1987) demonstrate that a greater
presence of outside directors reduces management consumption of perquisites when the
bank takeover market is limited due to state regulations.
While advisory roles are not generally attributed to independent directors (Fama
and Jensen, 1983, and Mace, 1986), they may provide information and advisory skills to
the board along with their monitoring function. In either case, we expect a higher
probability of survival for thrifts whose boards contain a higher percentage of independent
directors.
10
3.2b. The advisory role of affiliated directors
Considerable evidence of the board’s monitoring efficacy exists, but no clear
evidence of its purported advisory role is available. Affiliated directors, while lacking the
objectivity to be effective monitors, may provide information and advisory skills to the
board. The structure of most corporate boards is consistent with this multi-functional
view. Klein (1998) reports that, on average, 42% of the directors of large US corporations
are either insiders (i.e., current or former employees of the company or their family
members) or affiliated outsiders (i.e., they have a significant business or financial
connection to the company or its managers). She also finds that affiliated directors hold a
larger proportion of board seats in firms deemed to have greater information needs and
concludes this is consistent with the purported informational role for affiliated directors.
In contrast, Gilson (1990) provides evidence that appears inconsistent with this
advisory acumen. He studies the evolution of board composition of 111 firms that filed
for bankruptcy or privately restructured their debt between 1979 and 1985. Within one
year of filing or restructuring, the median percentage of “quasi-insiders” on the board
drops from 10% to 0%. Because Gilson’s quasi-insiders include directors with family ties
to the manager, they are not a perfect substitute for our definition of affiliated directors.
However, there is no difference between the rate of post-restructuring departure and
appointment for these directors with family ties. Quasi-inside directors account for 13.3%
of all board departures versus 6.5% of all board appointments. Affiliated lawyers and
former managers comprise a majority of the quasi-insider departures (65.4%). These two
groups comprise a significantly smaller portion (21.5%) of newly appointed affiliated
11
directors. While subject to an obvious selection bias, this evidence provides no support
for the notion of affiliated directors as valuable advisors. Blockholders who step in to
restructure financially-distressed firms appear to remove and not replace affiliated
directors.
The thrift crisis provides a striking opportunity to reexamine the advisory role of
affiliated directors, because the board’s information, advice, and connections were sorely
needed by thrift managers in this rapidly changing environment. If affiliated outside
directors serve a valuable advisory role, then thrifts with a higher percentage of affiliated
outside directors should be better situated (than thrifts with smaller percentages of
affiliated directors) to manage the risks and exploit the opportunities created by the
industry-wide changes of the 1980s. According to the advisory hypothesis, thrifts whose
boards have higher percentages of affiliated outside directors will have a lower probability
of failure than will other thrifts.
These monitoring and advisory hypotheses are not mutually exclusive or
competing. Nothing precludes both affiliated and independent directors playing important
complementary roles on corporate boards. While our results will not be entirely
generalizable, they alleviate some of the selection bias problems encountered in
interpreting Gilson (1990), because we have a group of firms that faced a common
industry-wide crisis split into complementary subsamples that survived and did not
survive the crisis.
12
3.3. The role of equity ownership
Ownership of a company’s stock by officers and directors as well as large holdings
by outside investors can be a potentially important determinant of managerial behavior.11
The following section makes predictions based on whether the equity is held internally by
executives, or externally by potential monitors.
3.3.a Internal ownership
Managerial and director stock ownership increases the amount of their wealth
dependent on stock price performance, and so aligns the interests of managers and
directors with those of shareholders. Some empirical studies have detected a nonlinear
relationship between managerial ownership and corporate performance (see, for example,
McConnell and Servaes (1990) or Morck, Shliefer and Vishny (1988)). A possible
explanation for this non-linearity has been suggested by Stulz (1988), who shows that high
levels of managerial stock ownership can allow managers to insulate themselves from
many governance mechanisms thereby accentuating the conflict between executives and
shareholders.
In the thrift industry, unintentional regulatory effects may have overwhelmed the
entrenchment effects described by Stulz (1988), while still producing a non-linear relation
between ownership and performance. Barth (1991) argues that the FHLBB’s relaxation of
ownership concentration rules, federally insured deposits, and relatively low capital
11 In 1982, the FHLBB eliminated the regulatory prohibition against individuals and families owning more
than 10% of a thrift’s outstanding stock and against businesses owning more than 25% of the stock. This
change allowed investors to acquire large blocks of stock and created new incentives for managerial
behavior and investor oversight.
13
requirements combined to create a situation conducive to the pursuit of high-risk
investment strategies. With large ownership stakes, but little invested capital at risk,
owner/managers during this period clearly had an incentive to go for broke. Esty (1997a,
1997b) shows that this distortion of managerial risk-bearing incentives was greatly
exacerbated by the period’s proliferation of thrift conversions from mutual to stock form
and the distorting effect of deposit insurance. Once again, this shift in risk preferences
underscores the importance of internal governance systems during this natural experiment.
Examining the ownership structure of thrifts, Cebenoyan, Cooperman and Register
(1999) detect a positive relation between the risk-taking of thrifts and managerial
ownership from 1986 to 1995. Specifically, manager-owned thrifts engage in more risktaking than other thrifts, a behavior that was unprofitable during the lax regulatory period
of the late-1980s and profitable during the more restrictive period of the early-1990s.
Thus, if the thrift failures of the thrift crisis were driven by regulations that created
perverse risk-taking incentives for managers with large equity stakes, the probability of
thrift failure may be especially high for thrifts with greater insider holdings. Appealing to
the reasoning of Stulz (1988), we specify typical non-linear models in our analysis of thrift
ownership.
3.3.b External ownership
Since the benefits of monitoring accrue to shareholders in proportion to their
ownership stakes, outside investors who own large blocks are more likely to incur the
costs of monitoring the activities of thrifts. Additionally, large block holders are often
professional investors with an expertise in evaluating companies that results in lower
14
monitoring costs than for the average investor. The presence of large blocks of stock held
by investors outside of the company increases the likelihood that monitoring will occur,
and thereby, increases the quality of managerial decisions. Therefore, larger block
holdings by outside investors are likely to be associated with a lower probability of failure.
3.4 Managerial compensation
Well-designed compensation contracts provide incentives that shift managerial
preferences toward those of shareholders. In the manufacturing sector, Mehran (1995)
finds a positive relation between firm performance and the percentage of equity-based
compensation received by managers.
Typically, executive compensation comes in three forms: salary, bonus, and stock
options (or some other type of stock-based vehicle such as stock appreciation rights).
Baker, Jensen and Murphy (1988) note that the level of compensation determines where a
person works but the structure of the compensation package determines how hard they
work. Therefore, we examine two aspects of managerial compensation.
3.4.a Compensation level hypothesis
In well-functioning labor markets, higher quality executives receive higher
compensation. The value of compensation paid primarily in the form of salary depends
heavily on corporate solvency, thereby creating incentives for managers to incur less risk
than shareholders prefer. During the thrift crisis, managers with preferences for less risk
may have avoided some of the risk-bearing temptations that arose with deregulation,
thereby protecting the solvency of their institutions. If we could link better management
15
to firm survival unambiguously, evidence of higher CEO compensation (per unit of assets)
for managers of non-failed thrifts would indicate that these firms had better managers.
However, interpretation of such a result is obscured by the fact that ex-post results are the
product of both managers’ ex ante choices and luck.
3.4.b Compensation structure hypothesis
The structure of compensation contracts on thrift failure is more difficult to
discern. Managers’ risk preference shifts toward that of shareholders as the proportion of
compensation based on stock performance increases. However, the optimal proportion of
compensation linked to performance that creates appropriate risk-taking incentives cannot
be determined a priori. Barth’s (1991) argument, that high levels of executive stock
ownership combined with deposit insurance and small equity investments induces
plunging strategies among managers, applies to performance-based compensation as well.
According to this view, thrifts where performance-based pay comprises a greater
portion of managerial compensation are more likely to fail because managers take more
risks thereby placing less weight on corporate solvency. Recognizing the possibility for
increased risk-taking incentives with high levels of performance-based compensation, we
test for a non-linear relation between corporate survival and the proportion of executive’s
performance-based pay.
16
4. The sample
4.1 Sample selection
Barth, Beaver and Stinson (1991) note that “a comprehensive list of publiclytraded thrifts in not readily available.” Therefore, they compile a sample of 165 publiclytraded thrifts from ten separate data sources. We thank Mary Barth for generously sharing
this sample.12 After screening this sample further for the stock market, accounting and
proxy statement data needed in this study, we had a sample of 86 thrifts operating in the
mid-1980s.
Of these 86 thrifts, 36 survived through 1995 either in their original form or as a
holding company. Another 24 financially-sound firms were either acquired or merged
with other thrifts during the period 1986-1995.13 The remaining 26 thrifts either became
bankrupt, were taken over by regulators, or were acquired by another thrift with the
assistance of a government insurance or regulatory agency during the sample period.
Table 1 shows how the entire sample changes over the sample period due to acquisitions
and mergers of sound thrifts and failures. The highest incidence of failures (9 firms)
occurs in 1990 followed by 7 in 1989. The failures are clearly clustered in time,
potentially reflecting the surge in failure resolutions mandated by the passage of FIRREA
in 1989. Over 60% of the failures occurred during a two-year span (1989 or 1990) and
none fall outside a five-year window from 1988 to 1992. Acquisition and merger activity
12
Pages 60-61 of Barth, Beaver and Stinson (1988) for details of their sample selection process.
concluded these firms were financially sound after reviewing press reports at the time of the
transaction and records of government assistance in mergers and acquisitions and finding no press reports
involving financial distress for any of the firms. Moreover, none of these transactions involved government
13 We
17
of sound thrifts is relatively unclustered. Five acquisitions occur in both 1988 and 1994.
At least one acquisition occurs in all years except 1990, the year that failures peaked.
4.2 Sample description
Table 2 displays the geographical distribution of sample across the state that issued
each thrift’s charter. California, with 17 thrifts, was the greatest contributor to the sample,
while only a single thrift was provided by Texas. California’s prominence and Texas’
near absence reflects contrasts in their branching laws during this decade. California had
relatively liberal branching laws that had allowed its thrifts to grow to the extent that
going public became more likely. In contrast, the restrictive branching laws of Texas
limited institutional size and reduced the likelihood that Texas thrifts would go public.
5. Results
Tables 3, 4 and 5 provide pairwise comparisons of the size and internal governance
attributes of our three subsamples. Table 3 contrasts failed and surviving thrifts, table 4
contrasts failed and acquired thrifts, and table 5 contrasts acquired and surviving thrifts.
We have 288 observations across years for our sample of 86 thrifts, yet no single year
contains data for all the thrifts in that sample. Lacking compelling grounds for focussing
on any particular year, we base the statistics reported in tables 3 – 5 on the data closest to
1989 for each of the 86 thrifts in the sample. Any choice of focal year is unavoidably
arbitrary, so we chose 1989 because the median of the observations occurred during that
year. Nevertheless, the reported results proved insensitive to the use of other focal years.
assistance, a characteristic generally associated with financial distress at either or both of the firms. We
elaborate on this point later in this section.
18
5.1 Comparing thrifts that failed to thrifts that survived the crisis
Panel A of table 3 indicates that thrifts that failed during this period were similar in
size to thrifts that survived the crisis. The only significant variation detected in the mean
of the ratio of market capitalization to total assets. The marginal significance (at the 10%
level) of the parametric test is uncorroborated by the nonparametric significance test. In
contrast, panels B and C reveal significant differences in the board composition and equity
ownership of independent board members across failed and surviving thrifts. Thrifts that
failed during the thrift crisis had significantly fewer independent directors and more
affiliated directors than thrifts that survived. Further, independent directors at surviving
firms held nearly three times as much equity as their counterparts at failed thrifts.
This evidence is consistent with the literature that suggests that firms whose boards
are dominated by independent directors are more likely to act in the interest of
shareholders.
5.2 Comparing thrifts that failed to thrifts that were acquired during the crisis
Panel A of table 4 indicates that whether measured in terms of total assets or
market capitalization, thrifts that failed during this period were significantly larger than
their counterparts that were acquired. As in table 3, the market capitalization to total
assets ratio is marginally lower for the failed thrift sample.
The remaining panels of table 4 reveal differences between failed and acquired
thrifts in all three dimensions of internal governance that we study. In contrast to thrifts
that failed, the boards of thrifts acquired during the crisis were dominated by independent
19
directors. For a typical 10-member thrift board, failed thrifts had 4 independent directors
in comparison to the 6 independent directors typical to their acquired counterparts. In
failed thrifts these two seats were generally occupied by affiliated directors and to a lesser
extent by inside directors. Affiliated directors occupied nearly twice as many board seats
at failed thrifts (27%) as they occupied at acquired thrifts (15%). Failed thrifts also filled
a greater proportion of their board seats with insiders (35% versus 24%), although the
significance of this difference is detected only through the nonparametric test.
Inside directors of failed thrifts held nearly twice as much equity (11% versus 6%)
as their counterparts at acquired thrifts. This pattern is reversed for independent directors,
with independent directors of failed thrifts owning roughly 1% of their firm’s equity
compared to the 2% holdings of their counterparts at acquired thrifts.
CEOs of failed thrifts received more total compensation ($335,634) than CEOs at
acquired thrifts ($238,493). This difference is driven by their fixed compensation, with
CEOs at failed thrifts receiving $316,573 versus the $175,269 received by CEOs at
acquired thrifts. Yet, CEOs at acquired thrifts are actually better compensated than their
counterparts at failed thrifts when we control for the assets under their management.
The evidence presented in tables 3 and 4 is broadly consistent with the internal
governance directives of Jensen (1993) and others. Thrifts that failed during the thrift
crisis had governance structures that were poorly aligned with the interests of nonmanagement shareholders relative to firms that survived either as independent firms or as
targets of acquisitions.
20
5.3 Comparing thrifts that were acquired to thrifts that survived the crisis
The preceding analysis begs the question of whether thrifts that were acquired are
failures or survivors in the context of natural selection. We address this question through
two comparisons. First, we repeat the analysis of preceding tables to determine whether
acquired and surviving thrifts are similar in their size and internal governance structures.
Second, we compare the long-term return performance of both failed thrifts and acquired
thrifts relative to a benchmark portfolio of the returns of thrifts that survived the thrift
crisis.
Panel A of table 5 shows that acquired thrifts were significantly smaller than thrifts
that survived as independent firms. CEOs of acquired firms received greater fixed and
total compensation than their counterparts at surviving thrifts, but this difference is driven
by thrift size. CEOs of acquired thrifts are compensated at least as well as their
counterparts at surviving thrifts when we control for assets under management.
Absent other differences in the characteristics considered, it is plausible that size
and the consequent ease of purchase is the only essential difference between thrifts that
were acquired during the crisis and thrifts that remained independent. The acid test of this
conjecture for finance practitioners is whether these dichotomous outcomes benefit or
harm shareholder interests.
Panel A of table 6 compares the buy-and-hold return of each acquired thrift from
January 1, 1985 through the date of their last trade to the mean buy-and-hold return of the
36 surviving thrifts over the same time period. The mean difference is positive and
21
insignificant (p-value = 0.21), so we conclude that shareholders of thrifts acquired during
the thrift crisis would have prospered at least as well as shareholders of thrifts that
survived the crisis. Therefore, we do not differentiate between thrifts that survived and
thrifts that were acquired during the remainder of the paper.
Panel B of table 6 applies panel A’s procedure to thrifts that failed during the thrift
crisis. The buy-and-hold return of each failed thrift is cumulated from the beginning of
1985 through their last trade then it is compared to the mean buy-and-hold return of the 36
surviving thrifts over the same time period. Not surprisingly, the individual differences
are uniformly negative and the mean difference is significant and exceeds 100%.
5.4 Comparing thrifts that failed to thrifts that did not fail during the crisis
Our separate analyses of the size, governance characteristics, and stock returns of
our samples that thrifts acquired during the thrift crisis and thrifts that survived the crisis
differ only on the basis of asset size. Therefore, subsequent analyses treat these two
categories as a single category of non-failed thrifts. Table 7 documents the univariate
differences between the size and governance characteristics between 26 failed thrifts and
60 non-failed thrifts.
The summary statistics indicate that failed thrifts were larger and more poorly
capitalized than thrifts that did not fail. The most conspicuous difference between failed
and non-failed thrifts was their board composition, with failed thrifts filling a greater
proportion of their seats with inside and affiliated directors as by extension, a smaller
proportion with independent directors. On average, the boards of thrifts that did not fail
during the thrift crisis were dominated by independent directors. Figure 1 displays the
22
differences in the proportion of board seats held by director type at failed versus nonfailed thrifts. Failed thrift boards were dominated by inside and affiliated directors, in
contrast to the independent director dominated boards of the non-failed thrifts.
The equity holdings of independent directors at non-failed thrifts unambiguously
exceed those of their counterparts at failed thrifts. This suggests that independent
directors at the thrifts which avoided failure had stronger incentives to monitor than their
counterparts at failed thrifts.
The equity holdings of inside directors at thrifts that failed appear marginally
greater than those of their counterparts at non-failed thrifts. And the fixed compensation
of CEOs whose thrifts failed exceeded that of their peers at non-failed thrifts, but only in
absolute terms. When we control for assets under management the direction of this
difference swings toward the CEOs of non-failed thrifts and is only marginally significant.
5.5 Caveats and quandaries
We have encountered two criticisms of our use of firm failure as an indicator of
inferior management strategy. First, Jensen (1993) argues that managers too often
squander shareholder value because they are loath to exit unprofitable situations, thus
events that we label failures may be mislabeled strategic exits. While we agree with this
argument in principle, the failed thrifts’ buy-and-hold returns discussed in the preceding
paragraph provides an unambiguous test of this conjecture. All 26 of the differences
between the failed and surviving thrifts were negative consistent with an alternative
hypothesis that thrift exits during this crisis were not value enhancing.
23
Second, the strategy chosen by managers of the failed thrifts might have been
optimal ex ante considering the deposit insurance incentives for risk-taking that prevailed
during this period. However, such speculations seem comparable to arguing that
equipping automobiles with airbags is suboptimal because of the infrequency of collisions.
Not only did the crisis occur, Kane (1989) contends that it was predictable some three
years in advance. In the context of this study, the thrift crisis extinguished the
environment upon which such speculations about ex ante optimality are based.
5.6 Multivariate results
Our logistic regression analysis shows the relation between internal governance
mechanisms and institutional survival during the thrift crisis in a multivariate setting. The
binary dependent variable in these models is assigned the value one for failed thrifts and
zero for non-failed (i.e., acquired or surviving) firms. Thus, a negative coefficient implies
that increases in the associated variable increase the likelihood of a thrift surviving or
being purchased in an non-regulator-assisted acquisition, and a positive coefficient
indicates a higher probability of failure.
The variables used to test our hypotheses about the importance of corporate
governance to survival include: the percentage of affiliated and independent directors; the
stock ownership of each director class; the presence of unaffiliated blockholders; CEO
compensation per million dollars of assets; and whether the same individual occupies both
the CEO and Chairman’s post. Other variables control for potentially important nonfinancial characteristics of the sample firms as well as economic conditions during the
sample period. The firm specific control variables, which have been shown to be
important in other studies of thrifts, include: whether the thrift is headquartered in a state
24
with liberal regulations; firm size (measured as the natural log of total assets), type of
charter (federal or state); whether the firm was founded within the last five years; and
whether the thrift was converted to stock from mutual form during or after 1980. The
final set of control variables reflects the economic activity or economic conditions in the
state in which each sample firm is chartered. The specific state-level economic variables
considered include standard economic measures such as personal income, per capita
income, non-farm income, state population growth as well as more specific measures
including mining income, oil and gas income, mining employment (includes oil and gas
exploration) and permits for new home construction. The actual variables used in the
regression models are the percent change over the 3-year or 5-year period immediately
before the sample year for each observation, or the standard deviation over the 3-year or 5year period immediately before the sample year. Models were estimated with one control
variable and with combinations of variables. The tabulated results include the set of
economic control variables with statistically significant coefficients.
Table 8 presents results from three models that differ only in their inclusion of
board composition variables. These results are based on all 288 observations for the
sample of 86 thrifts. The coefficient estimates are corrected for the intertemporal
dependence of repeated observations drawn from the same firms, and coefficient standard
errors are computed using the robust technique of Huber (1967) and White (1980). All
three models in table 8 are significant with p-values for the Chi-squared test of less than
1%. The pseudo-R-squared for the models range from 56% to 60%. Overall, the results
reported in table 8 confirm the univariate indications that thrifts with proportionally more
independent directors were less likely to fail during the thrift crisis.
25
Model 1 includes variables for both the proportion of affiliated (i.e., gray) outside
directors and independent outside directors. The coefficient estimate for the proportion of
independent directors is negative and significant indicating that a higher proportion of
independent directors is associated with a higher probability of non-failure (survival or
acquisition without regulatory assistance). In model 1 the coefficient estimate for the
proportion of gray directors is positive and significant at only the 6%level. The sign of the
coefficient indicates that boards with more gray directors had a higher likelihood of failure
during the thrift crisis than firms with fewer gray directors. This weak result may be due to
the very high correlation between the proportion of independent and gray directors (ρ =
57%). Table 7 revealed no difference in board size between failed and non-failed thrifts,
and only a slight difference between those groups in their proportions of inside directors.
Thus, among our sample firms board composition strategies vary almost exclusively
according to the proportion of affiliated outside directors versus independent outside
directors.
Models 2 and 3 address this possibility of co-linearity affecting the coefficient
estimates by including just one of the board composition variables. In model 2 the
coefficient estimate for the proportion of independent directors is again negative and
significant (p-value = 0.001). This result is consistent with the arguments of Baysinger
and Butler (1985) and the evidence of Byrd and Hickman (1992) and Shivdasani (1993)
that independent outside directors can serve an effective role in controlling managerial
behavior and enhancing shareholder during major corporate events. In model 3 the
coefficient estimate for the proportion of affiliated directors is positive and highly
significant (p-value = 0.001). This result suggests that affiliated directors served a
26
detrimental role in thrift failures during the thrift crisis and contrasts with Klein’s (1998)
evidence of affiliated directors’ efficacy as advisors and information providers.
The coefficient estimate for the equity ownership of inside directors is not
significant in any of the three models. The coefficient estimate for equity ownership of
gray directors is positive and significant in all models. This indicates that as affiliated
directors hold more stock there is a higher probability of failure among those firms they
direct. This evidence appears to contradict our conventional notions that greater equity
ownership helps align the interests of managers (or directors) and shareholders.
The coefficient estimate for equity ownership of independent directors is negative
and significant in all models. This result agrees with standard theories about equity
ownership aligning the interests of managers (or directors) and shareholders. Completing
our findings pertaining to the thrifts’ board and ownership structures, we detect no relation
between the presence of an unaffiliated blockholder and the probability of a thrift’s
survival during the thrift crisis.
Turning to CEO attributes, we find that thrifts were significantly more likely to fail
if their CEO also served as Chairman. This evidence contradicts the argument made by
Brickley, Coles and Jarrell (1997) that the unitary management position is optimal. It
confirms earlier evidence that found an association between accounting performance
measures and dual leadership (Pi and Timme, 1993). The CEOs of thrifts that
subsequently failed received significantly less compensation relative to the assets
managed than their counterparts at non-failed thrifts. One plausible explanation for this
compensation differential is that better managers were identified and paid more than less
27
effective managers. We find no relation between the probability of failure and the
proportion of the total compensation that was salary (or salary and bonus).
Firm-specific attributes related to thrift failure include firm size, charter type, age,
and recent conversion from mutual to stock form thrift. Consistent with our univariate
statistics, the logistic regression confirms that large thrifts were more likely to fail during
this period, as were thrifts with Federal charters. However, the interaction variable
between these two attributes reveals that thrifts that were both large and federally
chartered were actually less likely to fail. Unseasoned thrifts (those with five or fewer
years of existence) were significantly more likely to fail during the thrift crisis.
Perplexingly, we find that thrifts recently converted from mutual form were less likely to
fail during the thrift crisis. This result contradicts Esty (1997a) who detects increased risk
taking following mutual to stock form conversions during the 1980s.
State-specific attributes related to thrift failure include the state's disposition
toward bank regulations, growth in housing permits issued, change in population and
change in oil and gas income. Our analysis indicates that thrifts based in states with
liberal banking regulations were less likely to fail even after controlling for the growth in
housing starts. This result is inconsistent with the hypothesis that the greater powers
granted to thrifts by deregulation was a principal cause of the thrift crisis. It is, however,
consistent with our findings that corporate control variables are important in affecting firm
failure prospects in a deregulated environment. As expected, thrifts with higher growth in
housing starts are less likely to fail. Rapid growth in housing produces strong demand for
mortgage related credit which is the focus of thrift lending and reflects strong underlying
economic fundamentals which should be associated with limited default loss on thrift
28
loans. Growth in oil and gas income is associated with a lower probability of failure.
Greater population growth increases the likelihood of failure.
5.6 Robustness checks
Table 9 provides a robustness check of the methodology employed in table 8 by
repeating that analysis with a single observation for each firm. The single observation
selected was from 1989, the median year in our sample period, or the year closest to 1989
for each firm. The overall significance of the model remains, but the individual
significance of several explanatory variables falls.
When we include both the proportion of independent and the proportion of
affiliated directors in the regression, neither coefficient estimate is significant. These
variables are highly negatively correlated, ρ = –0.57, so we replicate the model isolating
the proportion of independent directors and the proportion of affiliated directors.
Consistent with our previous analysis, firms with larger proportions of independent
directors were less likely to fail during the thrift crisis. When isolated, the proportion of
affiliated directors resumes its significance, indicating that thrifts with larger proportions
of affiliated directors were more likely to fail during the thrift crisis.
The remainder of table 9 reveals an expected erosion in the significance of many of
the other firm-specific and state-specific variables due to the decline in degrees of freedom
associated with the smaller sample. Firm age and the state’s growth in housing permits
appear foremost among these variables. As before, unseasoned firms are more likely to
fail and high growth in the building sector of a thrift’s home state provide a powerful
inoculation against failure in the thrift crisis.
29
In addition to the tabulated results we examined several other specifications of
equity ownership. We tested quadratic and piecewise forms of inside, gray, and
independent director equity ownership (McConnell and Servaes (1990) and Morck,
Shliefer, and Vishny (1988)). In no case did these alternative specifications alter or
inform the results presented in tables 8 and 9. We also combined the equity stakes of
inside and gray directors and used it in place of separate ownership variables. The results
reflected the explanatory power of the gray ownership variable, albeit with less
significance.
We also estimated the multivariate model with the addition of a supervisory
goodwill dummy variable and a fraud dummy variable. The supervisory goodwill
variable reflects the potential influence of government inducements in the early 1980s to
healthy thrifts to acquire insolvent institutions. (White, 1991). The fraud dummy was
designed to capture the potential bias in our sample caused by looting behavior as
proposed by Akerlof and Romer (1993). Classification was based on a Lexis-Nexis
search. Fraud was reported for three of our failed institutions while three of the failed
and fourteen of the survivor institutions were reported as having been involved in
supervisory goodwill mergers. The addition of these two variables does not materially
change the results reported in tables 8 and 9. Finally, we estimate a random-effects
model of our broken panel data. These results, which are not tabulated, are qualitatively
identical to those reported for logit regressions in tables 8 and 9. The estimation was
based on the STATA ‘xtreg’ procedure.
30
6. Conclusions
We use the thrift crisis of the 1980s as a natural experiment to study the role that
internal governance systems play in a firm’s ability to adapt to economic shocks. Board
composition, outside director stock ownership, and CEO compensation contracts are all
significantly related to the survival rate of thrifts during this turbulent period, and they
remain so after we control for thrift-specific factors (size, age, form of charter, and for
recent conversions from mutual form) and state-specific factors (regulatory liberality,
economic conditions, and whether the thrift is state or federally chartered).
We find that the probability of failure decreases as the percentage of board seats
held by independent directors increases. In contrast, the probability of failure increases
as the percentage of affiliated outside directors increases. The evidence that director
independence decreases the likelihood of thrift failure corroborates other evidence that
independent directors defend shareholder interests, but our evidence of the detrimental
impact of affiliated directors on the probability of survival of thrifts is unique. It casts
doubt on the role of affiliated directors on the board and is in variance with Klein (1998),
who concludes that affiliated directors provide valuable information and advice to the
firms they direct. It also suggests that director classification schemes that use a simple
two-way classification system (e.g., inside and outside directors) may be missing
potentially important relationships.
We find that director ownership of stock has a different effect for affiliated and
independent outside directors. For affiliated directors higher equity ownership is
associated with a higher probability of failure, while for independent directors the
31
opposite is true. These results suggest that stock ownership tends to strengthen
independent outside directors’ incentives to make decisions that enhance shareholders’
wealth. The results for affiliated directors raise questions about their role on thrift boards
during this period.
Overall, our results add to the growing body of evidence that independent directors
support the interests of shareholders in corporate-level decisions such as takeovers or, in
our case, defining strategic direction during a time of severe turbulence. Our evidence
also suggests that much work remains to be done before we will have a clear
understanding of the role of affiliated directors on corporate boards.
32
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36
Figure 1. Percentage of board seats held by inside, a
independent directors at failed thrifts (indicated b
circle) and non-failed thrifts (indictated by the in
Insiders
29%
35%
Independen
37%
53%
18%
Affiliated
28%
37
Table 1
Calendar time distribution of sample
Year of failure or acquisition of 50 publicly-traded thrifts during the period 1986-1994. An additional 36
thrifts that survived the period intact are not included in the table. The 24 institutions that were acquired
during the 10-year window were financially-sound at the time of acquisition. All 26 thrift failures resulted
from bankruptcy or regulatory intervention and occur within a 6-year interval from 1987 to 1992.
Non-Failed
Year
Failed
1986
Acquired
Surviving
0
1
n.a
1987
2
2
n.a.
1988
2
4
n.a.
1989
4
2
n.a.
1990
9
0
n.a.
1991
6
3
n.a.
1992
3
1
n.a.
1993
0
6
n.a.
1994
0
5
n.a.
Totals
26
24
36
38
Table 2
Distribution of sample firms by state of charter of 86 publicly-traded thrifts. The sample includes 26 thrifts
that failed through bankruptcy or regulatory intervention and 24 financially-sound thrifts acquired during
the 10-year window from 1986-1994. The remaining 36 thrifts survived the period as independent firms.
State
AL
AR
AZ
CA
CO
CT
FL
GA
HI
IL
MA
MD
MI
MO
NC
NE
NH
NJ
NV
OH
OK
PA
PR
RI
SC
TN
TX
UT
VA
WA
WI
Totals
Total
2
1
1
17
2
2
12
3
1
3
4
2
3
1
1
1
2
2
1
1
2
5
1
1
1
1
1
1
7
3
1
86
Failed
0
1
1
7
1
0
2
0
0
1
2
1
0
0
1
0
1
0
0
0
1
1
0
0
0
1
1
0
4
0
0
26
39
Acquired
2
0
0
1
1
0
5
1
1
1
1
0
1
0
0
0
1
0
1
1
1
2
0
1
0
0
0
0
1
2
0
24
Surviving
0
0
0
9
0
2
5
2
0
1
1
1
2
1
0
1
0
2
0
0
0
2
1
0
1
0
0
1
2
1
1
36
Table 3
Comparison of 26 failed and 36 surviving thrifts.
Descriptive statistics for the size and governance characteristics of 62 publicly-traded thrifts. Contrasts 26
thrifts that failed during the thrift crisis through bankruptcy or regulatory intervention with 36 thrifts that
survived the 10-year study period as independent firms. Significance of the differences between the
subgroups’ statistics reflect parametric t-tests and the Wilcoxon rank-sum Z-test. Parametric tests for
differences in total assets and market capitalization are based on the natural logs of those figures. Total
assets and market capitalization data are in millions of dollars.
Failed
Surviving
Panel A: Size
thrifts
thrifts
Difference
Total assets
mean
4,593
5,416
–823
median
2,033
1,181
852
Market capitalization
mean
98
176
–78
median
43
41
2
Market capitalization/total assets
mean
2.71%
3.90%
–1.19% c
median
2.13%
3.32%
–1.19%
Panel B: Board characteristics
Board size
mean
median
mean
median
mean
median
mean
median
10.4
9.5
35.1%
34.9%
27.4%
25.0%
37.6%
42.2%
10.7
9.5
30.7%
30.0%
16.6%
17.1%
52.7%
50.0%
–0.3
0.0
4.4%
4.9%
10.8% a
7.9% a
–15.1% a
–7.8% a
mean
median
Total equity held by affiliated directors
mean
median
Total equity held by independent directors mean
median
Total equity held by all directors
mean
median
Unaffiliated blockholders’ equity:
mean
median
11.0%
7.3%
2.9%
0.4%
1.1%
0.6%
15.1%
10.9%
13.9%
10.2%
7.9%
4.9%
1.4%
0.3%
2.9%
1.7%
12.2%
9.8%
19.0%
18.9%
3.1%
2.5%
1.5%
0.1%
–1.8% a
–1.1% a
2.9%
1.1%
–5.1%
–8.7%
Proportion of inside directors
Proportion of affiliated directors
Proportion of independent directors
Panel C: Equity ownership
Total equity held by inside directors
Panel D: Compensation
Total compensation:
Fixed compensation:
Performance-based compensation:
Total compensation per $million assets:
Fixed compensation per $million assets:
Performance-based compensation
per $million assets
Performance-based compensation as
a portion of total compensation
mean
median
mean
median
mean
median
mean
median
mean
median
mean
median
mean
median
335,634
308,138
316,573
296,746
24,061
32.3
157.2
154.4
146.2
144.2
11.0
0.5
6.8%
0.05%
a
Statistically significant at the 1 percent level.
Statistically significant at the 5 percent level.
c
Statistically significant at the 10 percent level.
b
40
380,657
282,984
283,506
211,795
97,151
0
285.0
169.4
215.7
162.9
69.3
0.0
12.8%
0.00%
–45,023
25,154
28,067
84,951
–73,090
0
–127.8
–15.0
–69.5
–18.7
–58.3
0.5
–6.0%
0.05%
Table 4
Comparison of 26 failed and 24 acquired thrifts.
Descriptive statistics for the size and governance characteristics of 50 publicly-traded thrifts. Contrasts 26
thrifts that failed during the thrift crisis through bankruptcy or regulatory intervention with 24 financiallysound thrifts that were acquired between 1987 and 1995. Significance of the differences between the
subgroups’ statistics reflect parametric t-tests and the Wilcoxon rank-sum Z-test. Parametric tests for
differences in total assets and market capitalization are based on the natural logs of those figures. Total
assets and market capitalization data are in millions of dollars.
Panel A: Size
Total assets
Market capitalization
Market capitalization/total assets
Panel B: Board characteristics
Board size
Proportion of inside directors
Proportion of affiliated directors
Proportion of independent directors
mean
median
mean
median
mean
median
Failed
thrifts
4,593
2,033
98
43
2.71%
2.13%
Acquired
thrifts
1,250
698
39
27
3.82%
3.61%
mean
median
mean
median
mean
median
mean
median
10.4
9.5
35.1%
34.9%
27.4%
25.0%
37.6%
42.2%
9.5
9.0
27.7%
23.6%
15.0%
13.8%
57.3%
60.0%
0.9
0.5
7.4%
11.3% b
12.4% a
11.2% a
–19.7% a
–17.8% a
11.0%
7.3%
2.9%
0.4%
1.1%
0.6%
15.1%
10.9%
13.9%
10.2%
6.0%
3.8%
1.5%
0.5%
2.1%
1.4%
9.5%
6.4%
18.5%
21.0%
5.0% b
3.5%
1.4%
–0.1%
–1.0% c
–0.8% c
5.6% c
4.5%
–4.6%
–10.8%
335,634
308,138
316,573
296,746
24,061
32
157.2
154.4
146.2
144.2
11.0
0.5
6.8%
0.05%
238,493
200,463
175,269
159,325
63,234
0
365.9
204.6
230.7
177.4
135.1
0.0
14.4%
0.00%
Panel C: Equity ownership
Total equity held by inside directors
mean
median
Total equity held by affiliated directors
mean
median
Total equity held by independent directors mean
median
Total equity held by all directors
mean
median
Unaffiliated blockholders’ equity:
mean
median
Panel D: Compensation
Total compensation:
Fixed compensation:
Performance-based compensation:
Total compensation per $million assets:
Fixed compensation per $million assets:
Performance-based compensation
per $million assets
Performance-based compensation as
a portion of total compensation
mean
median
mean
median
mean
median
mean
median
mean
median
mean
median
mean
median
a
Statistically significant at the 1 percent level.
Statistically significant at the 5 percent level.
c
Statistically significant at the 10 percent level.
b
41
Difference
3,343 a
1,335 a
59 b
16 c
–1.11%b
–1.48%
97,141 b
107,675 b
136,304 a
137,421 a
–39,163
32
–208.7 b
–50.2 b
–84.5 a
–33.2 b
–124.1
0.5
–7.6%
0.05%
Table 5
Comparison of 24 acquired and 36 surviving thrifts.
Descriptive statistics for the size and governance characteristics of 60 non-failed, publicly-traded thrifts.
Contrasts 24 financially-sound thrifts that were acquired between 1987 and 1995 with 36 thrifts that
survived as independent firms. Significance of the differences between the subgroups’ statistics reflect
parametric t-tests and the Wilcoxon rank-sum Z-test. Parametric tests for differences in total assets and
market capitalization are based on the natural logs of those figures. Total assets and market capitalization
data are in millions of dollars.
Acquired
Surviving
Panel A: Size
thrifts
thrifts
Difference
Total assets
mean
1,250
5,416
–4,167 b
median
698
1,181
–483 b
Market capitalization
mean
39
176
–137 c
median
27
41
–14 c
Market capitalization/total assets
mean
3.82
3.90%
–0.08%
median
3.61
3.32%
0.29%
Panel B: Board characteristics
Board size
mean
median
mean
median
mean
median
mean
median
9.5
9.0
27.7%
23.6%
15.0%
13.8%
57.3%
60.0%
10.7
9.5
30.7%
30.0%
16.6%
17.1%
52.7%
50.0%
–1.2
–0.5
–3.0%
–6.4%
–1.6%
–3.3%
4.6%
10.0%
mean
median
Total equity held by affiliated directors
mean
median
Total equity held by independent directors mean
median
Total equity held by all directors
mean
median
Unaffiliated blockholders’ equity:
mean
median
6.0%
3.8%
1.5%
0.5%
2.1%
1.4%
9.5%
6.4%
18.5%
21.0%
7.9%
4.9%
1.4%
0.3%
2.9%
1.7%
12.2%
9.8%
19.0%
18.9%
–1.9%
–1.1%
0.1%
0.2%
–0.8%
–0.3%
–2.7%
–3.4%
–0.5%
2.1%
Proportion of inside directors
Proportion of affiliated directors
Proportion of independent directors
Panel C: Equity ownership
Total equity held by inside directors
Panel D: Compensation
Total compensation:
Fixed compensation:
Performance-based compensation:
Total compensation per $million assets:
Fixed compensation per $million assets:
Performance-based compensation
per $million assets
Performance-based compensation as
a portion of total compensation
mean
median
mean
median
mean
median
mean
median
mean
median
mean
median
mean
median
238,493
200,463
175,269
159,325
63,234
0
365.9
204.6
230.7
177.4
135.1
0.0
14.4%
0.0%
a
Statistically significant at the 1 percent level.
Statistically significant at the 5 percent level.
c
Statistically significant at the 10 percent level.
b
42
380,657
282,984
283,506
211,795
97,151
0
285.0
169.4
215.7
162.9
69.3
0.0
12.8%
0.0%
–142,164 b
–82,521
–108,237 b
–52,470 b
–33,927
0
80.9
35.2
15.0
14.5
65.8
0.0
1.6%
0.0%
Table 6
Buy-and-hold returns for 26 acquired thrifts and 24 failed thrifts relative to a benchmark portfolio of 36
thrifts that survived (remained independent) the thrift crisis.
Comparison of buy-and-hold returns for thrifts that do not remain independent due to takeover (panel A) or
due to bankruptcy or regulatory intervention (panel B), and a portfolio of 36 thrifts that survived as
independent firms beyond January 1, 1995. The returns are cumulated daily returns beginning January 1,
1985 and ending on CRSP’s last trading date. The benchmark return is the mean of the 36 buy-and-hold
returns of the surviving thrifts cumulated over the same period as the exiting firm to which it is being
compared.
Panel A: Acquired thrifts
Date of last
trade
Alabama Federal Thrift Assoc.
American Thrift Assoc. - FL
Atico Financial Corp.
Boston Five Cents Savings Bank - MA
Buckeye Financial Corp.
Central Holding Co.
Central Pennsylvania Savings Assoc.
Columbia Federal Savings Bank
First American Federal Thrift Assoc.
First Federal Bank FSB - NH
First Federal Thrift - VA
First Western Financial Corp.
Fortune Financial Group, Inc.
Freedom Federal Savings Bank – Oak Brk
Guarantee Financial Corp. – CA
Heart Federal Thrift Assoc. – CA
Home Federal Bank FSB - FL
Home Federal Thrift Assoc. Co. - Rock
International Holding Cap
Landmark Savings Assoc – Pittsburgh
Local Federal Thrift Assoc. - OK
Mid State Federal thrift
Old Stone Corp.
Pacific First Financial Corp.
1993-12-31
1988-04-29
1991-03-28
1993-10-13
1991-01-24
1994-04-08
1994-09-30
1988-04-29
1993-12-31
1988-06-30
1986-04-07
1994-10-31
1994-06-23
1988-08-02
1987-10-30
1991-03-28
1987-07-24
1993-06-30
1994-03-31
1992-06-30
1989-08-21
1993-12-13
1993-01-28
1989-12-01
43
Return of
Return of
Difference
acquired thrift surviving thrifts
2.760
0.829
-0.442
-0.046
0.247
0.435
1.153
2.417
1.283
0.938
0.071
0.742
0.871
0.572
0.956
3.404
1.178
1.356
1.626
-0.330
-0.097
1.358
-0.840
1.581
1.308
0.054
-0.132
1.471
-0.313
1.173
1.424
0.054
1.308
0.093
0.307
1.254
1.341
0.097
0.022
-0.132
0.309
0.980
1.123
0.271
0.314
1.250
0.976
0.165
mean
t-statistic
pr(t)
1.452
0.775
-0.310
-1.516
0.560
-0.738
-0.272
2.363
-0.025
0.845
-0.235
-0.512
-0.471
0.475
0.934
3.536
0.870
0.376
0.502
-0.601
-0.411
0.108
-1.816
1.416
0.304
1.279
0.214
Table 6 (continued)
Panel B: Failed thrifts
Date of last
trade
American Federal Thrift Assoc.
Atlantic Financial Federal
Atlantic Permanent Federal Thrift
Centrust Savings Bank
Comfed Savings Bank – Lowell, MA
Financial Corp. of America
Financial Corp. – Santa Barbara
First Federal Thrift Assoc. - TX
Germania F A
Gibraltar Financial Corp.
Great American First Savings Bank
Heritage Financial Corp.
Home Federal Thrift Assoc. - CA
Home Owners Federal Thrift Assoc.
Investors Thrift Assoc.
Landmark Land, Inc.
Mercury Thrift Assoc.
Metropolitan Federal Thrift TN
North Carolina Federal Thrift
Perpetual American Bank FSB- VA
Savers Bancorp Inc.
Savers Federal Thrift Assoc. - AR
Second National Building & Loan
Sooner Federal Thrift Assoc.
Transohio Financial Corp.
Western Thrift Assoc. - AZ
1989-05-09
1990-01-10
1989-02-14
1990-01-22
1990-12-14
1988-09-08
1990-05-30
1988-05-04
1990-06-15
1990-03-28
1991-11-14
1990-09-26
1992-04-10
1990-07-03
1991-12-12
1991-10-23
1990-05-15
1991-04-26
1990-03-02
1991-07-17
1991-05-13
1987-01-13
1992-12-03
1989-08-24
1992-07-17
1989-06-16
44
Return of failed
Return of
Difference
thrift
surviving thrifts
-0.987
-0.953
-0.778
-0.828
-0.992
-0.988
-0.996
-0.934
-0.951
-0.991
-0.998
-0.969
-0.988
-0.994
-0.992
-0.961
-0.983
-0.990
-0.922
-0.932
-0.989
-0.958
-0.919
-0.969
-0.979
-0.968
0.120
0.060
0.133
0.028
-0.320
0.087
-0.028
0.045
-0.007
-0.019
-0.012
-0.314
0.226
-0.056
-0.061
-0.008
-0.049
-0.093
0.017
-0.048
-0.086
0.336
0.622
0.320
0.423
0.203
mean
t-statistic
pr(t)
-1.107
-1.013
-0.911
-0.856
-0.671
-1.074
-0.968
-0.979
-0.943
-0.972
-0.986
-0.655
-1.213
-0.938
-0.931
-0.953
-0.934
-0.897
-0.939
-0.884
-0.903
-1.294
-1.541
-1.289
-1.402
-1.170
-1.016
-25.620
0.000
Table 7
Comparison of 26 failed and 60 non-failed thrifts.
Descriptive statistics for the size and governance characteristics of 86 publicly-traded thrifts. Contrasts 26
thrifts that failed during the thrift crisis through bankruptcy or regulatory intervention with 60 financiallysound thrifts that survived through 1995 or were acquired without regulatory assistance. Significance of
the differences between the subgroups’ statistics reflect two-way parametric t-tests and the Wilcoxon ranksum Z-test. Parametric tests for differences in total assets and market capitalization are based on the
natural logs of those figures. Total assets and market capitalization data are in millions of dollars.
mean
median
mean
median
mean
median
Failed
thrifts
4,593
2,033
98
43
2.71%
2.13%
Non-failed
thrifts
3,751
840
122
33
3.87%
3.50%
Difference
842
1,193b
–24
9
–1.16%b
–1.37%
mean
median
mean
median
mean
median
mean
median
10.4
9.5
35.1%
34.9%
27.4%
25.0%
37.6%
42.2%
10.2
9.0
29.5%
27.6%
16.0%
14.3%
54.5%
52.8%
0.2
0.5
5.6%
7.3%c
11.4%a
10.7%a
–16.9%a
–10.6%a
mean
median
Total equity held by affiliated directors
mean
median
Total equity held by independent directors mean
median
Total equity held by all directors
mean
median
Unaffiliated blockholders’ equity:
mean
median
11.0%
7.3%
2.9%
0.4%
1.1%
0.6%
15.1%
10.9%
13.9%
10.2%
7.1%
4.5%
1.4%
0.3%
2.6%
1.5%
11.1%
8.7%
18.8%
18.9%
3.9% c
2.8%
1.5%
0.1%
–1.5%a
–0.9%b
4.0%
2.2%
–4.9%
–8.7%
335,634
308,138
316,573
296,746
24,061
32
157
154
146
144
11.0
0.05
6.8%
0.05%
323,792
212,506
240,211
182,933
83,580
0
317
173
222
169
95.63
0.00
13.4%
0.00%
11,842
95,632
71,362c
113,813b
–59,519
32
–160c
–19
–75.52 c
–25
–84.64
0.05
–6.6%
0.05%
Panel A: Size
Total assets
Market capitalization
Market capitalization/total assets
Panel B: Board characteristics
Board size
Proportion of inside directors
Proportion of affiliated directors
Proportion of independent directors
Panel C: Equity ownership
Total equity held by inside directors
Panel D: Compensation
Total compensation:
Fixed compensation:
Performance-based compensation:
Total compensation per $million assets:
Fixed compensation per $million assets:
Performance-based compensation
per $million assets
Performance-based compensation as
a portion of total compensation
a
b
c
mean
median
mean
median
mean
median
mean
median
mean
median
mean
median
mean
median
Statistically significant at the 1 percent level.
Statistically significant at the 5 percent level.
Statistically significant at the 10 percent level.
45
Table 8
Logistic analysis of governance characteristics of failed and non-failed thrifts
The dependent variable, FAIL, is equal to 1 if the institution failed between 1987 and 1995, and 0
otherwise. The regressors include variables for the corporate control mechanisms, asset and liability
powers, firm size, type of charter, firm age, and the effect of local economic conditions. The local
economic condition variables include the percentage change in the number of new housing permits issued,
population change, and change in oil and gas industry income in the state in which the thrift is chartered.
The p-values (in parentheses) are estimated using robust standard errors that are computed assuming the
observations are independent across firms but not between years for each firm.
Explanatory Variables
Model 1
b
Intercept
% Board Seats Held by Independent Directors
% Board Seats Held by Affiliated Directors
% Equity Held by Inside Directors
% Equity Held by Affiliated Directors
% Equity Held by Independent Directors
D(Unaffiliated Blockholders)
D(CEO is Chairman)
Total CEO Compensation / Total Assets
(CEO’s Salary + Bonus) / CEO’s Total Comp.
D(Firm Age < 5 Years)
ln(Total Assets)
D(Federally Chartered Institution)
D(Charter in Liberal Regulatory State)
Interaction [D(Federal Charter) x ln(Total Assets)]
D(Converted from Mutual to Stock Form)
Annual Growth (Housing Permits in Home State)
3-yr % Change in population in charter state
3-yr % Change in oil & gas income in charter state
Number of firm-years of data
Likelihood Ratio (χ2)
Pseudo R2
a
Statistically significant at the 1 percent level.
Statistically significant at the 5 percent level.
c
Statistically significant at the 10 percent level.
b
46
Model 2
Model 3
-15.95
(0.172)
a
-9.28
(0.001)
-26.55
(0.010)
a
-21.83
(0.037)
b
-7.08
(0.035)
c
5.32
(0.056)
-2.40
(0.457)
b
23.44
(0.015)
b
-37.60
(0.036)
-0.079
(0.905)
a
2.28
(0.008)
b
-0.012
(0.018)
-1.76
(0.363)
a
-8.55
(0.000)
a
4.12
(0.007)
a
41.84
(0.002)
a
-3.01
(0.009)
a
-5.36
(0.002)
c
1.57
(0.063)
a
-5.69
(0.005)
b
72.83
(0.045)
c
-0.77
(0.083)
288
-2.38
(0.448)
a
26.57
(0.004)
b
-40.39
(0.018)
-0.195
(0.762)
b
2.05
(0.014)
a
-0.014
(0.005)
-2.51
(0.195)
a
-8.19
(0.000)
b
3.76
(0.024)
a
39.69
(0.006)
a
-3.64
(0.002)
a
-5.05
(0.007)
b
1.64
(0.046)
a
-5.61
(0.006)
b
72.68
(0.043)
c
-0.80
(0.051)
288
9.55
(0.001)
0.63
(0.842)
b
22.78
(0.048)
b
-46.50
(0.019)
-0.082
(0.899)
a
2.24
(0.005)
c
-0.008
(0.073)
-1.08
(0.590)
a
-7.28
(0.000)
a
3.88
(0.005)
a
38.38
(0.001)
b
-2.05
(0.014)
a
-4.94
(0.001)
c
1.55
(0.086)
a
-4.99
(0.002)
59.98
(0.066)
c
-0.67
(0.078)
288
44.91
(0.0004)
60%
44.79
(0.0003)
58%
59.47
(0.0000)
56%
a
Table 9
Logistic analysis of failed and non-failed thrifts using a single observation for each firm
Logistic regressions with single observation per thrift. The single observation is from 1989 or the
observations closest to 1989 for each firm. The dependent variable, FAIL, is equal to 1 if the institution
failed between 1987 and 1995, and 0 otherwise. The regressors include variables for the corporate control
mechanisms, asset and liability powers, firm size, type of charter, firm age, and the effect of local economic
conditions. The local economic condition include the percentage change in the number of new housing
permits issued, population change, and change in oil and gas industry income in the state in which the thrift
is chartered. The p-values (in parentheses) are estimated using robust standard errors that are computed
assuming the observations are independent across firms but not between years for each firm.
Explanatory Variables
Intercept
% Board Seats Held by Independent Directors
% Board Seats Held by Affiliated Directors
% Equity Held by Inside Directors
% Equity Held by Affiliated Directors
% Equity Held by Independent Directors
D(Unaffiliated Blockholders)
D(CEO is Chairman)
Total CEO Compensation / Total Assets
(CEO’s Salary + Bonus) / CEO’s Total Comp.
ln(Total Assets)
Model 1
-37.81 b
Model 2
-31.75 b
Model 3
-42.73 a
(0.012)
(0.032)
(0.008)
-5.52
-7.41 b
(0.107)
(0.027)
9.08 b
4.67
(0.259)
(0.018)
-4.42
-4.36
-1.41
(0.299)
(0.352)
(0.755)
13.07
13.60 b
13.45
(0.072)
(0.042)
(0.112)
-66.26 b
-69.65 b
-72.30 b
(0.020)
(0.021)
(0.025)
2.18
1.45
3.36
(0.442)
(0.626)
(0.245)
1.85 b
1.59 c
2.00 b
(0.019)
(0.071)
(0.012)
-0.003
-0.005
-0.001
(0.427)
(0.373)
(0.588)
-0.41
-1.59
1.24
(0.907)
(0.630)
(0.733)
5.63 a
5.30 b
5.45 a
(0.008)
(0.018)
(0.008)
D(Federally Chartered Institution)
46.75 a
44.49 b
45.18 a
(0.008)
(0.021)
(0.006)
Interaction [D(Federal Charter) x ln(Total Assets)]
-6.08 a
-5.76 b
-5.89 a
(0.010)
(0.025)
(0.008)
-5.63 a
-5.76 a
-5.07 a
(0.000)
(0.000)
(0.000)
1.73 b
1.88 b
1.40
(0.033)
(0.017)
(0.099)
-2.63 c
-3.07 c
-1.60
(0.083)
(0.061)
(0.132)
D(Firm Age < 5 Years)
D(Converted from Mutual to Stock Form)
D(Charter in Liberal Regulatory State)
Annual Growth (Housing Permits in Home State)
3-yr % Change in population in charter state
3-yr % Change in oil & gas income in charter state
Number of firms
Likelihood Ratio (χ2)
Pseudo R2
a
Statistically significant at the 1 percent level.
b
Statistically significant at the 5 percent level.
c
Statistically significant at the 10 percent level.
47
-4.56
-3.95
-4.91
(0.161)
(0.241)
(0.094)
61.88
61.34
54.05
(0.139)
(0.162)
(0.143)
-1.12 c
-1.34 b
-0.89
(0.085)
(0.035)
(0.148)
86
86
86
34.46
33.35
31.85
(0.011)
(0.010)
(0.016)
50.4%
49.2%
47.2%