The role of outside directors in bank acquisitions

We examine the relation among the stock returns of successful bidders in bank acquisitions, the composition of the boards of directors, and directors' stock ownership. We find that abnormal returns are negatively related to the proportion of outside directors, but positively related to the number of other outside directorships held by independent outsiders. Abnormal returns are positively related to the proportion of ownership by outside directors, but are associated only with high levels of inside ownership. These results support the notions that the governance structure of banking firms is significantly different from that of nonfinancial firms, and that empirical findings on internal control mechanisms cannot be generalized from nonfinancial firms to banks.