New Challenges for the Banking Industry: Searching for Balance Between Corporate Governance, Sustainability and Innovation (Palgrave Macmillan Studies in Banking and Financial Institutions)

This book aims to enrich the banking and finance literature by gathering insights in new research topics being undertaken in the aftermath of the Covid-19 pandemic. The book spans all the major research fields in finance and banking with a particular focus on corporate governance, sustainability and innovation. The book brings together academics at a range of European universities and stems from research presented at the 2022 Annual Conference of the Wolpertinger Club. The first part focuses on the impact of banks’ corporate governance practice on their performance, including pay gaps as well as diversity and ESG policies. The second part examines how banks are conducting their green transition with topics including reputational risk, greenwashing, green bonds, and ESG scores. The final section of the book considers the role of digitalization and innovative technologies in creating unprecedented disruption in the banking sector. This edited collection is valuable tothose researching in finance, banking and business, as well as policymakers and operational decision makers at financial institutions. Contents 6 Notes on Contributors 8 List of Figures 17 List of Tables 18 1 Introduction 22 Part I Corporate Governance 28 2 Compensation Policy in Banking: The Case of Tournament Incentives 29 2.1 An Introduction to Compensation and the Role of Incentives 29 2.2 Executive Pay and Tournament Incentives in Banking 33 2.3 Data and Summary Statistics 38 2.4 Methodology for Estimating the Effect of CEO Pay Gaps on Bank Performance 44 2.5 Results on the Relationship Between Tournament Incentives and Bank Performance 46 2.6 Discussion 51 2.7 Conclusions and Implications for Compensation Policy 55 Appendix A: Variable Definitions 56 Appendix B: Additional Tables 57 References 62 3 The Effect of Board Diversity and ESG Engagement on Banks’ Profitability and Risk 67 3.1 Introduction 67 3.2 Literature Review 70 3.2.1 Corporate Governance and the Relevance of Board Diversity 70 3.2.2 ESG and Performance in the Bank Sector 72 3.3 Data and Methods 75 3.3.1 Sample and Data Sources 75 3.3.2 Board Diversity Variable Measurement 75 3.3.2.1 Performance Measures 76 3.3.2.2 Control Variables 77 3.3.3 Models 80 3.4 Results 89 3.5 Conclusions 91 References 92 4 ESG Default Risk Mitigation Effect: A Time-Sectorial Analysis 99 4.1 Introduction 99 4.2 Literature Review 101 4.3 Data and Methods 103 4.3.1 Data 104 4.3.2 Methods 106 4.4 Results 109 4.4.1 Empirical Results 110 4.4.2 Robustness Test 114 4.5 Conclusions 115 References 116 5 Principles of the Optimal Government Regulation in the Financial Market 119 5.1 Introduction 119 5.2 Market Failures in the Banking Market 120 5.3 Principles of Regulation 127 5.4 Conclusions 131 References 132 Part II Sustainability and Green Finance 136 6 Firm Pollution and Reputational Risk: Where Do We Stand? 137 6.1 Introduction 137 6.2 What Do We Know? A Review of the Literature 139 6.2.1 The Firm and the Environment 139 6.2.1.1 Interplay Between Environmental and Financial Performance 139 6.2.1.2 Environmental Performance and Financing Cost 141 6.2.1.3 Environmental Performance and Corporate Governance 142 6.2.1.4 Corporate Ownership and Environmental Responsibility 144 6.2.2 Reputational Risk and Pollution 144 6.2.2.1 Driving Factors of Corporate Reputation 144 6.2.2.2 Reputational Risk and CSR 145 6.3 ESG-Related Reputation and Corporate Pollution: An Exploratory Analysis 146 6.3.1 Hypothesis and Methodology 147 6.3.2 Data and Empirical Results 149 6.4 Conclusions 150 References 155 7 Is All That Glitters That “Green”? An Empirical Investigation of the Magnitude of Greenwashing in Banking and Its Determinants 162 7.1 Introduction 162 7.2 Research Methodology 166 7.2.1 Overview 166 7.2.2 Greenwashing Score 167 7.3 Methodology 169 7.3.1 Definition of the Greenness Disclosure Score 173 7.3.2 Definition of a Greenness Performance Score 174 7.3.3 Computation of the Greenwashing Score 175 7.4 Empirical Model 175 7.5 Sample 178 7.6 Results 178 7.6.1 Descriptive Statistics 178 7.6.2 Multivariate Analysis 182 7.6.3 Robustness Tests 186 7.7 Conclusion 189 Appendix 191 References 196 8 Sovereign Green Bonds in Europe: Are They Effective in Supporting the Green Transition? 201 8.1 Introduction 201 8.2 Literature Review 204 8.3 The Evolution of Green Bond Regulation 209 8.4 The Rise of Sovereign Green Bond Issuances 213 8.4.1 Data Analysis on Disclosure, Transparency and Reporting 219 8.5 Conclusions 223 Appendix 225 References 225 9 The Impact of ESG Score and Controversy on Stock Performance 229 9.1 Introduction 229 9.2 Literature Review and Hypotheses Development 230 9.3 Data and Methodology 232 9.3.1 Data 232 9.3.2 Variables Definition 233 9.3.2.1 Dependent Variables 233 9.3.2.2 ESG, Controversy and Control Variables 234 9.3.3 Methodology 236 9.4 Empirical Results 237 9.4.1 Descriptive Statistics 237 9.4.2 Research Findings 240 9.4.3 Robustness Checks 256 9.5 Conclusion 261 Appendix A: Sample Description 261 Appendix B: Controversies Distribution 265 References 266 Part III Innovation 269 10 The Digitalization of the European Banking Industry: Some Evidence 270 10.1 Introduction 270 10.2 Literature Review: Banking Digitalization 273 10.3 Methodology 277 10.3.1 Measuring the Digitalization of the Banking Industry 277 10.3.2 Sample and Data 279 10.3.3 Methodology 281 10.4 Digitalization of the Banking Industry: 2017–2021 283 10.4.1 Evolution of IT Expenses in the European Banking Industry 283 10.4.2 Determinants of IT Expenses in the Banking Industry 286 10.4.3 Staff Expenses vs IT Expenses 286 10.5 New Banking Technologies 289 10.5.1 Toward a New Technological Era in Banking 289 10.5.2 Relevance of the New Banking Technologies in the European Banking Industry 291 10.6 Conclusions 292 References 293 11 The Relation Between Patent Pledgeability and Credit Rationing 297 11.1 Introduction 297 11.2 Patents and Patenting Firms in Sweden 301 11.3 Patent Collateralization for Receiving Debt Financing 303 11.3.1 Theoretical Framework 303 11.3.2 The Model 305 11.4 Data and Empirical Analysis 308 11.4.1 Data 308 11.4.2 The Research Design 309 11.5 Results and Conclusion 312 References 314 12 Increasing the Predictive Power of Financial Distress models—The Case of the New Alert System Proposed by the Italian Nccaae 318 12.1 Introduction 318 12.2 Literature Review 322 12.3 Sample Selection Strategy and Description 324 12.4 Methodology 326 12.5 Results 331 12.6 Conclusions 341 References 345 Index 349