Governance, risk-taking and default risk during the financial crisis: the evidence of Japanese regional banks

Purpose: This study aims to provide additional insights by further investigating the governance aspects including board composition, risk monitoring and management by the board, ownership structures as well as the incentive compensation. Design/methodology/approach: This study investigates the relationships between corporate governance, risk-taking behaviors and default risk by analyzing 78 publicly listed Japanese regional banks during the 2007-2008 crisis period. Findings: Banks that were more diversified in the run-up to the crisis were associated with higher default risk during the crisis. Foreign shareholders may have prompted banks to engage in higher risk-taking activities in pursuit of higher returns, putting banks at a higher risk of default. On the other hand, board-level risk management committees may have mitigated the risks to protect firms from rising default. Finally, banks perceived to have better quality accounting information, by being audited by one of the Big 4 auditors, benefitted by mitigating price misevaluation and thus reducing default risk during the crisis. Originality/value: Different from the majority of previous related studies on the relationship between governance and performance of stock returns, the current study focuses on the relationship between governance and default risk during the crisis which has a more direct link through which governance practices can affect risk-taking behaviors and thus the default risk during the crisis. In addition to examining conventional governance aspects, this study also focuses on the more relevant aspects of banks’ risk monitoring functions.