Ownership structure and bank performance in EU-15 countries

Pages509-530
DOIhttps://doi.org/10.1108/CG-06-2017-0112
Date12 February 2018
Published date12 February 2018
AuthorCarlo Migliardo,Antonio Fabio Forgione
Subject MatterCorporate governance,Strategy
Ownership structure and bank
performance in EU-15 countries
Carlo Migliardo and Antonio Fabio Forgione
Abstract
Purpose The purpose of this paper is to investigate the impact of ownership structure on bank
performance in EU-15 countries. Specifically, it examines to what extent shareholder type and the degree
of shareholder concentration affect the banks’ profitability, risk and technical efficiency.
Design/methodology/approach This study uses a sample of 1,459 banks operating in EU-15
countries from 2011 to 2015. It constructs a set of continuous variables capturing the ownership nature,
the concentration and their interactions, and estimates an instrumental variable random effect (IV-RE)
model. In addition, a panel data stochastic frontier analysis is conducted to estimate the time-varying
technical efficiency for profitability and costs.
Findings The empirical analysis shows that bank performance is affected by shareholder type. When
regressed against the entrenchment behavior of the controlling owner hypothesis, banks with large-block
shareholders are more profitable, less risky and more profit efficient. Further, ownership concentration
reverts the negative effect related to the institutional, bank and industry ownership.
Research limitations/implications The results support the hypothesis that concentrated ownership
helps to overcome agency problems. They also confirm that managerial involvement in banks’ capital
enhances a bank’s profit and its volatility.
Originality/value To the best of the authors’ knowledge, this is the first study to consider the ownership
nature, the concentration and their interaction using continuous variables, which allows for more precise
inferences. The results provide new evidence that bank profitability, cost efficiency and risk are affected
by the type of direct shareholders.
Keywords Ownership concentration, Bank performance, Ownership nature,
Panel data stochastic frontier analysis
Paper type Research paper
1. Introduction
Bank distress can induce systemic effects (Stulz, 2015): banks played a central role in
the 2007-2009 global financial crisis, too often failing in their mission to allocate
resources efficiently and attenuate systemic risk[1]. This crisis, along with the
consequences of the Eurozone crisis, brought about a surge in empirical research
investigating its causes and effects, including the role of ownership and shareholding
structure[2]. Indeed, scholars generally agree that the recession was partly due the
shortcomings of the banking sector, and that banks’ excessive risk-taking before the
crisis is related to their respective corporate governance mechanisms (Brunnermeier,
2009; De Young and Torna, 2013). Furthermore, Peni and Va
¨ha
¨maa (2012) document
that US bank holdings with better corporate governance practices performed better
during the 2007-2009 financial crisis.
In support, Berger et al. (2016) provide evidence that, during the downturn in the USA,
banks’ ownership structures play a substantial role in explaining the likelihood of bank
failure: failure dramatically increases with the shareholding by lower-level managers, due to
their moral hazard incentives.
Carlo Migliardo and
Antonio Fabio Forgione
both are Professors at the
Department of Economics,
Universita degli Studi di
Messina, Messina, Italy.
JEL classif‌ication – G21,G32,
C33
Received 9 June 2017
Revised 23 November 2017
Accepted 15 January 2018
Both authors contributed
equally to each section of the
article.
The authors thank two
anonymous referees for their
critical comments and
suggestions. The usual
disclaimer applies.
DOI 10.1108/CG-06-2017-0112 VOL. 18 NO. 3 2018, pp. 509-530, © Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 509
In the light of this framework, this paper aims to use new data and methods to reconsider
two particular pitfalls present in the literature, both extensively reported in Section 2: the
impact of ownership concentration and its nature on bank performance, with a special
consideration of the channel of banks’ technical efficiency. The literature mainly focuses on
the impact of the nature of the ultimate shareholders and their concentration (dispersed vs
concentrated) by adopting dummy variables related to the ownership structure. Against this
background, the present paper provides further insights that contribute to the literature in
three significant ways.
First, this paper is the first to study how different types of shareholders and ownership
concentrations affect banks’ profitability, technical efficiency and risk aptitude, using
continuous variables that precisely and extensively express the participation of each type of
shareholder (government institutions, banks, institutional investors, industrial companies,
families and managers). This empirical strategy enables the authors to capture the marginal
effect of each type of shareholder on bank performance more accurately than with
qualitative analysis; it also clarifies the interaction effect between ownership type and
concentration.
Second, the present study is the first to evaluate the impact of corporate governance
profiles after the 2007-2009 financial crisis, using a broad data set of more than 1,450
European banks. Unlike previous research that focuses only on commercial banks, this data
set covers almost all bank specializations. This is an important point, as the causes and
consequences of the financial crisis also involved non-traditional banks. Moreover, this
analysis is based on a multi-country data set. Indeed, European banks constitute a valid
laboratory for the present research as they operate in an integrated and interconnected
market, which increases competitive pressure over time and exposes the banks to global
shocks more often (Camilla et al., 2013).
Finally, the present paper belongs to a very small corporate governance literature that
assesses technical efficiency using panel stochastic frontier analysis (SFA). Moreover, none
of the previous work in this area deals with the correlation between this sophisticated index
of efficiency and almost all the type of shareholders and their concentration. Overall, the
present study aims to provide substantial knowledge for bank stakeholders and enhance
the guidelines for bank policy reform. Specifically, this analysis evaluates if the nature of the
banks’ capital providers is an element of vulnerability during financial storms.
The remainder of the paper is organized into the following sections. Section 2 reviews the
literature on the corporate governance profiles investigated in this study. Section 3
describes the empirical methodology and presents the sample and the summary statistics.
Section 4 reports and discusses the main results. Section 5 presents some concluding
remarks.
2. Literature review
This section reviews previous studies regarding the relationship between banks’ financial
performance and the two main corporate governance profiles investigated in the present
analysis, that is, shareholder concentration and shareholder nature.
2.1 Shareholder concentration
The literature regarding the impact of ownership dispersion on bank performance provides
mixed results. On one hand, some studies find that a larger ultimate shareholder exerts a
positive impact on bank risk taking, specifically resulting in fewer insolvency risk measures,
fewer non-performing loans and a better asset allocation policy (Iannotta et al., 2007;
Shehzad et al., 2010; Forssbaeck, 2011)[3], whereas concentration does not affect, or only
slightly affects, bank profitability (Grove et al., 2011). Focusing on Asian banks,
PAGE 510 jCORPORATE GOVERNANCE jVOL. 18 NO. 3 2018

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