Concentrated Control, Institutions, and Banking Sector: An International Study
46 Pages Posted: 24 Aug 2007
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: Suggested Citation