Concentrated Control, Institutions, and Banking Sector: An International Study

46 Pages Posted: 24 Aug 2007

See all articles by In-Mu Haw

In-Mu Haw

Texas Christian University - M.J. Neeley School of Business

Simon S. M. Ho

Hong Kong Baptist University

Bingbing Hu

Hong Kong Baptist University (HKBU)

Donghui Wu

The Chinese University of Hong Kong; Center for Institutions and Governance

Abstract

Significant concentration of control rights in the hands of controlling owners is documented in not only industrial firms, but also banking sector. Using a broad sample of listed commercial banks in East Asia and Western Europe from 1990 to 1998, we investigate the relationships between concentrated control and banking performance, cost efficiency, and risk profile, and whether these relationships vary across legal and regulation regimes. We find that banks with concentrated control exhibit poorer performance, lower cost efficiency, as well as greater risk-taking and higher insolvency risk. Further evidence shows that both legal protection and private monitoring work most effectively in restricting the detrimental effects induced by concentrated control, while official disciplinary power plays a minor role in this setting, and government intervention aggravates these effects. Overall, our results are consistent with the contention that country-level institutions are the most critical shield against insider expropriation, and that market discipline works more effective than official discipline and supervision in regulating banking sector. We also find that a higher control concentration is associated with higher default risk in East Asian banks, but not in West European banks; and that Asian banks with concentrated control suffered more significant performance deterioration and risk escalation during the Asian financial crisis, which suggests that concentrated control is more problematic in Asia than in Europe.

Keywords: concentrated control, legal protection, regulation, banking

JEL Classification: G20, G21, G28, G32

Suggested Citation

Haw, In-Mu and Ho, Simon S. M. and Hu, Bingbing and Wu, Donghui, Concentrated Control, Institutions, and Banking Sector: An International Study. 20th Australasian Finance & Banking Conference 2007 Paper, Available at SSRN: https://ssrn.com/abstract=1009627 or http://dx.doi.org/10.2139/ssrn.1009627

In-Mu Haw

Texas Christian University - M.J. Neeley School of Business ( email )

Fort Worth, TX 76129
United States
817-921-7563 (Phone)
817-921-7227 (Fax)

Simon S. M. Ho

Hong Kong Baptist University ( email )

Department of Economics
Kowloon, Hong Kong
Hong Kong

Bingbing Hu (Contact Author)

Hong Kong Baptist University (HKBU) ( email )

Department of Economics
Kowloon, Hong Kong
Hong Kong

Donghui Wu

The Chinese University of Hong Kong ( email )

Sha Tin
N.T.
Hong Kong
852-3943 7836 (Phone)
852-2603 5114 (Fax)

HOME PAGE: http://www.bschool.cuhk.edu.hk/staff/wu-donghui/

Center for Institutions and Governance ( email )

Room 1033, 10/F
Cheng Yu Tung Building, No. 12 Chak Cheung Street
Hong Kong
China

HOME PAGE: http://www.bschool.cuhk.edu.hk/centres/centre-for-institutions-and-governance/

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