We examine a vertical integration decision within the commercial banking industry. During the last quarter of the 20th century, some community banks reduced their traditional reliance on correspondent banks for upstream products and services by joining bankers' banks, a form of business cooperative. Research on vertical integration focuses primarily on firm-specific investment, market power, and government regulation. However, this case is difficult to explain in terms of these standard vertical integration motives. Our evidence suggests that bankers' banks are a response to technological change and deregulation that results in increased costs faced by community banks in dealing with correspondent banks as both suppliers and potential competitors. For instance, loan participations require sharing proprietary information about major loan customers, something a community bank would not want to provide to a potential competitor.

We use a well-developed dynamic panel generalized method of moments (GMM) estimator to alleviate endogeneity concerns in two aspects of corporate governance research: the effect of board structure on firm performance and the determinants of board structure. The estimator incorporates the dynamic nature of internal governance choices to provide valid and powerful instruments that address unobserved heterogeneity and simultaneity. We re-examine the relation between board structure and performance using the GMM estimator in a panel of 6,000 firms over a period from 1991 to 2003, and find no causal relation between board structure and current firm performance. We illustrate why other commonly used estimators that ignore the dynamic relationship between current governance and past firm performance may be biased. We discuss where it may be appropriate to consider the dynamic panel GMM estimator in corporate governance research, as well as caveats to its use.