bank's risk-taking and ownership structure – evidence for economics in transition stage

14
Applied Economics, 2011, 43, 1551–1564 Bank’s risk-taking and ownership structure – evidence for economics in transition stage Shuching Chou a, * and Fengyi Lin b a Department of Graduate Institute of Finance, National Yunlin University of Science and Technology, 123, Section 3, University Road, Touliu, Yunlin, 640 Taiwan b Department of Business Management, National Taipei University of Technology, 1, Section 3, Chung-Hsiao E. Rd., Taipei, 106 Taiwan Conventional studies assume that inside management plays a major role in corporate governance and argue that foreign institutional investors may lack incentives to monitor invested firms due to their short-term profit orientation. By utilizing 650 observations of Taiwan banks, this study examines the effects of specific types of ownership on the risk-taking behaviours of banks under differential ownership structures. In light of the increasing foreign institution ownership during privatization, this article further constructs relative governance strength variables to observe how inside management and foreign institutions interact to affect these banks’ risk-taking. The results show that banks with higher inside management ownership and higher government ownership have higher overdue loan and lower capital adequacy ratios. Banks with higher foreign institution ownership and stronger relative governance strength are associated with lower overdue loans and higher regulatory capital. In general, the results are consistent regardless of the choice of ownership structure or relative governance strength of foreign institutions as independent variable. These findings contribute to add evidence for risk-taking behaviour manifested by banks in the emerging market, where feasible monitoring mechanisms still need to be explored. I. Introduction In recent years, emerging markets in East Asia have faced economic deregulation and the banking sector is considered to have a critical role in facili- tating the development of the capital market during the transition stage (Lin, 2008). Thus, the corporate governance of banking has been emphasized to enhance these banks’ management (Ebrahim and Herz, 2007). Previous researchers emphasized that a bank’s ownership type will affect its governance procedures (Graves and Waddock, 1994; Johnson and Greening, 1999; Holland, 2001). Basel II also points out that board members and senior managers should oversee a bank’s internal control, make strategic risk management plans, and assess the adequacy of the bank’s capital position (Bank International Settlement (BIS), 2004). However, since the capital of most banks is provided by their depositors, the motivation of inside management in alleviating agency problems is questioned (Saunders et al., 1990). Banks characterized by government *Corresponding author. E-mail: [email protected] Applied Economics ISSN 0003–6846 print/ISSN 1466–4283 online ß 2011 Taylor & Francis 1551 http://www.informaworld.com DOI: 10.1080/00036840903018791

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Applied Economics, 2011, 43, 1551–1564

Bank’s risk-taking and ownership

structure – evidence for economics

in transition stage

Shuching Choua,* and Fengyi Linb

aDepartment of Graduate Institute of Finance, National Yunlin University ofScience and Technology, 123, Section 3, University Road, Touliu, Yunlin,640 TaiwanbDepartment of Business Management, National Taipei University ofTechnology, 1, Section 3, Chung-Hsiao E. Rd., Taipei, 106 Taiwan

Conventional studies assume that inside management plays a major role

in corporate governance and argue that foreign institutional investors

may lack incentives to monitor invested firms due to their short-term profit

orientation. By utilizing 650 observations of Taiwan banks, this study

examines the effects of specific types of ownership on the risk-taking

behaviours of banks under differential ownership structures. In light of the

increasing foreign institution ownership during privatization, this article

further constructs relative governance strength variables to observe how

inside management and foreign institutions interact to affect these banks’

risk-taking. The results show that banks with higher inside management

ownership and higher government ownership have higher overdue loan

and lower capital adequacy ratios. Banks with higher foreign institution

ownership and stronger relative governance strength are associated with

lower overdue loans and higher regulatory capital. In general, the results

are consistent regardless of the choice of ownership structure or relative

governance strength of foreign institutions as independent variable. These

findings contribute to add evidence for risk-taking behaviour manifested

by banks in the emerging market, where feasible monitoring mechanisms

still need to be explored.

I. Introduction

In recent years, emerging markets in East Asia

have faced economic deregulation and the banking

sector is considered to have a critical role in facili-

tating the development of the capital market during

the transition stage (Lin, 2008). Thus, the corporate

governance of banking has been emphasized to

enhance these banks’ management (Ebrahim and

Herz, 2007). Previous researchers emphasized that

a bank’s ownership type will affect its governance

procedures (Graves and Waddock, 1994; Johnson

and Greening, 1999; Holland, 2001). Basel II

also points out that board members and senior

managers should oversee a bank’s internal control,

make strategic risk management plans, and assess

the adequacy of the bank’s capital position (Bank

International Settlement (BIS), 2004). However, since

the capital of most banks is provided by their

depositors, the motivation of inside management in

alleviating agency problems is questioned (Saunders

et al., 1990). Banks characterized by government

*Corresponding author. E-mail: [email protected]

Applied Economics ISSN 0003–6846 print/ISSN 1466–4283 online � 2011 Taylor & Francis 1551http://www.informaworld.com

DOI: 10.1080/00036840903018791

control are also claimed to be less efficient (Casu and

Molyneux, 2003) and may have higher overdue loans

due to implicit guarantee. Thus, alternative gover-

nance mechanisms such as institutional investors

(Bushee, 1998) and market discipline (Eiffinger and

Tesfaselassie, 2007) have been proposed to reinforce

bank governance.Since the late 1990s, Taiwan’s banks have experi-

enced a continuous privatization process including

two major steps: transformation from being gov-

ernment owned into privately owned, and infusion

of foreign institution ownership. As shown in Fig. 1,

from 2001 to 2006, the average government owner-

ship decreased from 11.21% to 6.73%, foreign insti-

tutions ownership jumped from 3.55% to 16.74%

and managerial ownership decreased from 22.48% to

20.10%.1 These phenomena indicate that deregu-

lation has caused a dramatic ownership change in

banks. Will this changing ownership structure

affect banks’ governance and risk-taking policies?

This is a vital question for local policy makers and

academic researchers (Douma et al., 2006).By utilizing 650 observations of Taiwan’s banking,

this study examines the effects of specific types of

ownership on a bank’s risk-taking behaviours and

compares these behaviours with those under differ-

ential ownership structures dictated by the type

of largest shareholders. In light of the increasingly

important role of inside management and foreign

institution in a bank’s privatization, we then con-

struct the comparative governance strength variables

of these two monitoring mechanisms (Cremers and

Nair, 2005) and observe how inside management and

foreign institutions interact to affect these banks’

risk-taking behaviours.

The major findings include the following: (1) bankswith higher inside management ownership andhigher government ownership have higher overdueloans and lower capital adequacy ratios, (2) bankswith higher foreign institution and with strongerrelative governance strength are associated withlower overdue loans and higher regulatory capitaland (3) the risk-taking behaviour by inside manage-ment is alleviated in banks whose largest shareholdersare foreign institutions. In general, the results areconsistent regardless of the choice of ownership orrelative governance strength of foreign institutionsas independent variable. These findings contribute toadd evidence regarding banks’ risk-taking behavioursin the emerging market, where feasible monitoringmechanisms still need to be explored.

The remainder of this article is organized asfollows. Section II develops the literature review.Section III describes the data and model. Section IVanalyses the regression results. Section V presentsthe results of the robustness tests. Section VIconcludes.

II. Managerial and Institutional Owners’Incentives in Monitoring

Managerial ownership incentives

The canonical incentive hypothesis suggests thata higher managerial ownership could mitigateagency problems (Jensen and Ruback, 1983; Stulz,1988; Shleifer and Vishny, 1997). Lee (2004), usingNonperforming Loan (NPL) ratio as proxy forbank risk taking, finds that Korean banks withhigher levels of inside ownership are gearedtowards modest, deliberate, and profitable risk-taking strategies during periods of regulatory strin-gency. He proposed that the controlling shareholdersare more prudent as far as risk taking is concerneddue to nondiversifiable human capital and stakes.

However, since depositors provide around 80– 90%of the capital, some researchers doubt whether thesmall pro rata of banks’ managerial ownership couldbecome effective incentives to alleviate agencyproblems. Cebenoyan et al. (1999) indicate that thriftswith higher managerial ownership exhibit unprof-itable risk-taking behaviour during years of regula-tory laxity. Gorton and Rosen (1995) demonstratethat a bank’s NPL increases along with an increasein managerial ownership. Girardone et al. (2004)

0369

121518212427

2000 2001 2002 2003 2004 2005 2006 2007

Year

Rat

io

Board Government Foreign

Fig. 1. Trend of ownership structure change

1 The numbers are listed in Table 3, and the detailed description is provided in Section ‘Ownership structure and bank’srisk-taking’.

1552 S. Chou and F. Lin

find that a bank’s inefficient management is posi-tively correlated with the level of NPLs in Italy.Meanwhile Saunders et al. (1990) find that bankswhose managers hold a relatively large proportionof these banks’ stocks exhibit significantly higherrisk-taking behaviours than those banks whosemanagers hold a relatively small proportion duringthe period of deregulation. Furthermore, Yeh andWoidtke (2005) present that companies dominatedby affiliated controlling families have poorer gover-nance than those companies not dominated byfamilies. In fact, the managerial indirect ownershipusually causes divergence of cash flow right andcontrol right in Asia and leads to a grave agencyconflict between the controlling shareholders and thesmall shareholders (La Porta et al., 1999; Claessenset al., 2000).

Based on the current empirical findings, it isstill debatable whether or not higher managerialownership could be an effective incentive to monitora bank’s risk-taking behaviour.

Institutional ownership incentives

Apart from inside management, institution owners’role in governance has been proposed from differentaspects. Black and Coffee (1994) and Stapledon(1996) argue that institutional investors usuallyfocus on the short-term investment horizon due tothe industry’s regular performance assessments andranking. The need to rebalance their portfolio forself-performance improvement also limits the institu-tion’s time and resources in actively involving itself inthe affairs of its portfolio companies. Thus, transientinstitutional investors are often referred to as inactive(Goergen and Renneboog, 2001; Goomper andMetrick, 2001) and myopic investors who focus onshort-term earnings (Hirschman, 1970; Bushee, 1998)and lack incentives to incur monitoring costs on theirinvested firms (Porter, 1992).

However, some researchers propose that institu-tional investors could be an alternative governancemechanism (Holland, 2001). The common feature ofall institutional investors is that they have higherabilities to absorb and process information ascompared to individual investors (Bjuggren et al.,2007). The information advantage gives institutionalowners better ability to monitor companies in whichthey invest and assert a noticeable managerial influ-ence over invested companies (Janicki and Wunnava,2004). By examining Fortune 500 firms, Neubaumand Zahra (2006) find that long-term institutionalownership is positively associated with corporatesocial performance. Douma et al. (2006) also findthat foreign-invested firms, which have larger

shareholding, higher commitment and longer-terminvolvement engage higher profitability. Bushee(1998) and Dechow et al. (1996) state that institu-tional ownership can reduce managerial incentives tomanage earnings upwards. Ginglinger and L’her(2006) also propose that stock repurchase will havegood market reaction, especially when the firm issupported by institutional investors. These empiricalfindings all suggest that institutional owners areinclined to be sophisticated investors who couldreduce moral hazard problems, leading to betterperformance.

In banking, Berger et al. (2005) find that foreign-owned banks tend to have lower NPL ratios anddemonstrate better long-term performance on theaverage than state-owned banks in Argentina. Boninet al. (2005) also present consistent findings, showingthat banks with strategic foreign owners are morecost-efficient, while government-owned ones are lessefficient. In transient economies such as that ofTaiwan, the government deregulates the restrictionof foreign institutions’ participation in local banking.Whether foreign institutions with minor ownershipcan play a prudent role in monitoring banks’ risk-taking behaviuor or simply take a role as inactiveshareholders comprise the major focus of this study.

III. Data and Methods

Data and variables

Sample. The sample consisted of public banks in theTaiwan Exchange for the period encompassing 2001to 2006. After excluding samples with missing data,an unbalanced panel of 37 banks with 650 quarterlyobservations was adopted for analysis. The datawere drawn from banks’ annual reports, the MarketObservation Post System and the Taiwan EconomicJournal data bank.

To observe bank ownership evolution, four typol-ogies of banks were used: private banks, banks heldby a financial holding corporation, banks held byfinancial holding corporations with the governmentas the largest owner and banks held by the govern-ment (Jones, 1998). As shown in Table 1, the numberof government-owned banks has decreased from 17to six since 2001 (first row), while the number ofprivate banks has decreased from 21 to six (secondrow). By the end of 2006, there were 15 banks held byfinancial holding corporations, of which eight werestill owned by the government, while seven bankswere held by private financial holding corporations(second column). Most government-owned and

Bank’s risk-taking and ownership structure 1553

private banks that disappeared were transformed intofinancial holding corporations or were merged withother banks.

Variables. Table 2 lists the variable definitions.Table 3 shows the summary statistics of variablesby year and by the type of largest shareholders. Asshown in Panel B of Table 3, the direct managerialownership decreased from 22.48% to 20.10%, whileultimate ownership was around 23.28% from year2001 to 2006. The stakes held by foreign institutionsincreased from 3.55% to 16.74% over a periodof 6 years, and the government’s stockholdingsdecreased by almost 48% from 11.21% to 6.73% asa result of privatization. Table 3 shows, in general,that the ownership structure changes with the decre-asing managerial and government ownerships andincreasing foreign institution ownership.

Following Basel II which focuses on banks’ creditrisks and capital sufficiency, this study uses 6-monthand 3-month overdue loans and regulatory capitalas indexes to measure banks’ risk-taking behaviours.In Taiwan, the 6-month overdue loan is officiallyrecognized by banks and showed a decrease from10.18% to 2.75% from 2001 to 2006 (sixth row inPanel B). On the other hand, the 3-month overdueloan decreased from 15.27% to 3.55% (seventh rowin Panel B). The decreasing trend of overdueloans reflects banks’ effort to writeoff bad debts incompliance with the policy of financial reform.Table 3 shows that the average capital adequacyincreased from 9.52% to 9.83% with an averageof 10.45% (the eighth row in Panel B), which isabove the Basel Accord’s suggested minimum of 8%.The increasing magnitude of assets and branches

in Table 3 shows the results of banks’ integration andacquisition in recent years.

Panel C of Table 3 presents the statistics according

to the type of largest shareholders. The banks whoselargest shareholders are their board members and

supervisors have the highest overdue loans (6.11%and 9.08%) and the lowest regulatory capital

(9.84%). In contrast, the banks whose largest share-holders are foreign institutions have the lowest

overdue loans (2.05% and 2.70%) and the highestregulatory capital (13.04%). The p-value of the

Kruskal–Wallis test statistics is almost significantat the 0.0001 level, indicating that the classification of

the three types of largest shareholders accounts forthe significant differences among the listed variables.

Ownership structure and risk-taking behaviour

As shown in Fig. 1 and Table 1, the banktransformations that occurred from 2001 to 2006

have caused ownership structure changes on threemajor shareholders: inside management, foreign

institutions and the government. According to theliterature, stockholders with higher ownership may

manifest a more aggressive attitude in controlling risk(incentive hypothesis) or are less prudent in risk

taking due to an agency conflict from the controlright. To observe how ownership structure affects

a bank’s risk-taking behaviuor, we first utilize thepro rata stock ownership of the three kinds of

shareholders as independent variables. Afterwards,we identify the large stockholders in order to exam-

ine how the concentrated ownership of insidemanagement, foreign institutions and government

Table 1. Bank ownership structure transition year 2001–2006

Time 01/01/2001 31/12/2006 Increase (decrease)

Bank held by governmenta 17 6 (11)Private bank 21 6 (15)Bank held by Financial HoldingCorporation

3 7 4

Bank held by Financial HoldingCorporation whose largest owneris governmentb

1 8 7

Total 42 37 (5)

Notes: This table reports the evolution of bank’s ownership structure in Taiwan over year 2001 to 2006.The four typologies of ownership structure stated in this table are classified by the identification of bank’slargest owner: private companies, financial holding corporations, government-owned financial holdingcorporations and government.a Including two nonpublic banks – Bank of Land and Taiwan bank. The first bank is owned by firstfinancial holding companies whose largest shareholder is government in year 2001.b Including two nonpublic banks – Bank of Land and Taiwan bank.

1554 S. Chou and F. Lin

shareholders will ultimately affect a bank’s risk-taking behaviour. The empirical models are

Overdueit ¼ �0 þ �1Boardsuprit þ �2Foreignit

þ �3Governmentit þ �4Optleverageit

þ �5Assetit þ �6Branchit þ "it ð1aÞ

Overdueit¼ �0þ�1Boardsupritþ�2Foreignit

þ�3Governmentitþ�4Boardsupr�Highit

þ�5Foreign�Highitþ�6Government�Highit

þ�7Optleverageitþ�8Assetit

þ�9Branchitþ�it ð1bÞ

Regulatory Capitalit

¼ �0 þ �1Boardsuprit þ �2Foreignit

þ �3Governmentit þ �4Optleverageit

þ �5Assetit þ �6Branchit þ �it ð2aÞ

Regulatory Capitalit

¼ �0 þ �1Boardsuprit þ �2Foreignit

þ �3Governmentit þ �4Boardsupr�Highit

þ �5Foreign�Highit þ �6Government�Highit

þ �7Optleverageit þ �8Assetit

þ �9Branchit þ �it ð2bÞ

where Overdue includes 6-month and 3-month over-due loan rate, Regulatory Capital is the capitaladequacy ratio set by the Basel Committee, andBoardsupr, Foreign and Government are the stockownership held by board members, supervisors,foreign institutions and the government. High isdummy equal to one if specific ownership ishigher than the mean value, and zero if otherwise.Optleverage is measured by the ratio of fixed assets tototal assets as the control variable for banks’ risks(Lee, 2004). Asset refers to the natural logarithmof the total assets. Branch represents the number ofbank branches in Taiwan. Asset and Branch wereused to control the effect of a bank’s size on its risk-taking behaviuor.

To account for the management’s ultimate controlright through cross shareholding or pyramid owner-ship structure as indicated by La Porta et al. (1999),the sum of direct and indirect managerial ownership(Ultimate) is also utilized as inside ownership. Themodels were similar to Equations 1a, 1b, 2a and 2b,but not listed for brevity. Second, considering howthe dominant owners may play a critical role inaffecting a bank’s risk-taking behaviour and influencethe other stockhloders, we further classify the samplesinto three subsets according to the type of largestshareholders and compare the risk-taking behaviourin the three subsets. The models used are the sameas (1a) and (2b).

Relative governance strength of inside blockholdersand foreign institutions

In light of the increasingly important role of insidemanagement and foreign institutions in a bank’sprivatization, we then focused on how inside man-agement and foreign institutions interact to affecta bank’s risk-taking behaviour. Following Cremersand Nair (2005), we constructed measurement rela-tive governance strength by classifying managerial

Table 2. Variable definition

Variable Definition

Boardsupr The direct ownership owned by boardand supervisors.

Ultimate The direct and indirect ownership ownedby board and supervisors indicated byLa Porta et al. (1999).

Foreign The shares owned by foreigninstitutions.

Government The shares owned by local government.6-month

overdueThe 6-month overdue loan rate.

3-monthoverdue

The 3-month overdue loan rate.

Regulary Capital The capital adequacy ratio set by BaselCommittee.

Optleverage Optleverage is measured by the ratioof fixed assets to total assets.

Asset Asset is the natural logarithm oftotal asset.

Branch Branch represents the number ofbranches of banks in Taiwan.

High High is a dummy variable equal to oneif specific type of ownership higherthan mean.

MIN MIN¼MIN (managerial, foreign) inwhich the managerial ownership andforeign institution ownership areclassified into low, middle andhigh levels (1, 2, 3) at a cutoff of33-percentile and 67-percentile.

MAX MAX¼MAX (managerial, foreign) inwhich the managerial ownership andforeign institution ownership areclassified into low, middle andhigh levels (1, 2, 3) at a cutoff of33-percentile and 67-percentile.

Govdummy Govdummy is a dummy variable equal toone if government is the largest ownerof bank, and zero if otherwise.

Foreignd Foreignd is a dummy variable to identifyforeign institutions as the weaker orstronger side of monitoring strength.

Bank’s risk-taking and ownership structure 1555

and foreign institution ownership into low, middle,and high levels (score¼ 1, 2, 3) at cutoff rates of33-percentile and 67-percentile. The one at thehigher class of the governance category is defined to

have relatively stronger governance. The empirical

models are

Overdueit ¼ 0 þ 1MINit þ 2MAXit þ 3Govdummyit

þ 4Optleverageit þ 5Assetit

þ 6Branchit þ it ð3Þ

Regulatory Capitalit

¼ �0 þ �1MINit þ �2MAXit þ �3Govdummyit

þ �4Optleverageit þ �5Assetit

þ �6Branchit þ !it ð4Þ

where MIN and MAX represent a bank’s weaker and

stronger monitoring mechanisms. If the coefficient on

MIN is significant, the weaker relative governance

strength will affect the bank’s risk taking even if the

other stronger monitoring mechanism exists (com-

plementary effect). Utilizing category variables rather

than original ownership proportions helps us avoid

Table 3. Characteristics of sample banks

Panel A: Samples descriptionSample period Year 2001–2006Number of Banks 37Bank-quarter observations 650

Panel B: Bank characteristics by year (mean value)

Sample 2001 2002 2003 2004 2005 2006 Average

Sample 650 66 113 131 127 98 115 111Boardsupr (%) 650 22.48 21.21 19.99 19.58 18.38 20.10 20.15Ultimate (%) 650 23.45 23.76 24.03 23.03 21.70 23.47 23.28Foreign (%) 650 3.55 3.83 5.66 9.33 10.39 16.74 8.52Government (%) 650 11.21 7.42 8.91 8.56 6.53 6.73 8.076-month overdue loan (%) 650 10.18 7.18 5.65 4.25 3.19 2.75 5.223-month overdue loan (%) 650 15.27 11.89 8.51 5.75 4.04 3.55 7.69Regulatory Capital (%) 400 9.52 10.73 10.56 10.87 11.14 9.83 10.45Optleverage 650 0.020 0.019 0.018 0.017 0.017 0.016 0.018Asset (in billion) 650 403 000 428 000 490 000 578 000 599 000 690 000 539 000Branch 650 60 65 68 75 78 84 73

Panel C: Bank characteristics by largest shareholder’s type

Boardsupr Foreign GovernmentSignificant test p-value(Kruskal–Wallis)

Sample 502 117 31Boardsupr (%) 21.01 11.87 37.41 50.0001Ultimate (%) 23.50 18.12 39.13 50.0001Foreign (%) 3.33 30.89 8.14 50.0001Government (%) 7.49 1.95 40.58 50.00016-month overdue loan (%) 6.11 2.05 2.78 50.00013-month overdue loan (%) 9.08 2.70 4.00 50.0001Regulatory Capital (%) 9.84 13.04 11.49 50.0001Optleverage 0.017 0.0020 0.016 0.0020Asset (in billion) 510 000 663 000 559 000 50.0001Branch 73 71 70 0.0103

0

3

6

9

12

15

18

Low

Foreign institution ownership

Ris

k-ta

king

(%

)

6-month overdue loan 3-month overdue loan

Regulatory Capital

Middle High

Fig. 2. Foreign institution ownership and bank’s risk-taking

1556 S. Chou and F. Lin

neglecting the governance function of foreign institu-tions due to their minor stockholdings in the earlystage of deregulation.

Given that the participation of foreign insti-tutions is expected to be a part of the steps leadingto deregulation and privatization, we further iden-tify the dummy variable Foreignd to observe thegovernance effect by foreign institutions. If thecoefficient of MAX*Foreignd/MIN*Foreignd is sig-nificantly negative or positive in Equations 5 and 6,the foreign institution is considered to have adominant/complementary governance effect inmonitoring a bank’s risk-taking behaviour.

Overdueit¼ ’0þ’1MINitþ’2MAXit

þ’3MIN�Foreignditþ’4MAX�Foreigndit

þ’5Governmentitþ’6Optleverageit

þ’7Assetitþ’8BRANCHitþ$it ð5Þ

Regulatory Capitalit

¼ �0 þ �1MINit þ �2MAXit þ �3MIN�Foreigndit

þ �4MAX � Foreigndit þ �5Govdummyit

þ �6Optleverageit þ #7Assetit

þ �8BRANCHit þ it ð6Þ

Methodology

The estimation is carried out with random effectsthrough the Feasible Generalized Least Squares(FGLS) method to correct cross-sectional hetero-scedasticity and panel-specific autocorrelation(Wooldridge, 2002). Wald tests are also conductedto test the joint significance of model parameters.The Breusch–Pagan Lagrangian Multiplier (LM)test (Breusch and Pagan, 1980) was applied inconsideration of the unobserved effects. All depen-dent variables have Variance-Inflating Factor (VIF)below 10, indicating no serious multicollinearity.

IV. Empirical Results

Ownership structure and bank’s risk-taking

Direct and ultimate ownership as monitoring

mechanisms. Table 4 presents the results of theFGLS regression estimates of Equations 1a–2bin which the pro rata ownerships of managementand foreign institutions are measured as abank’s monitoring incentives. The significant nega-tive coefficients of Boardsupr (coefficient¼ 0.012,

p¼ 0.071 in Panel A, first column) and Government(coefficient¼ 0.022, p¼ 0.029 in Panel A, firstcolumn) show that those banks with higher equityheld by inside management and government havehigher 6-month overdue loans. Both coefficientsof joint tests for Boardsupr (coefficient¼ 0.006,p¼ 0.000 in Panel A, second column) andGovernment (coefficient¼ 0.328, p¼ 0.020 in Panel A,second column) for model (1a) are also significant,verifying that higher inside management and gov-ernment ownership lead to higher overdue loans.Panel A in Table 4 also shows that a higherinside management ownership is related to a lowerregulatory capital (Boardsupr coefficient of jointtest¼�0.003, p¼ 0.020 in Panel A, last column;Government coefficient of joint test¼�0.023, p¼0.006 in Panel A, the last four column).

For Panel B in which ultimate ownership ispresented as inside blockholders, the results regardinginside management and the government are similar toPanel A. However, the coefficient of the joint test forForeign on overdue loan is significantly negative(coefficient¼�0.010, p¼ 0.070 in Panel B, secondcolumn; coefficient¼�0.022, p¼ 0.015 in Panel B,fourth column) and significantly positive on regula-tory capital (coefficient¼ 0.019, p¼ 0.017 in Panel B,last column). These results indicate that a higherforeign institution ownership is associated with alower overdue loan and higher regulatory capital.

In general, the results in Table 4 imply that themore stock ownership held by inside management(board members and supervisors) and the gover-nment, the higher are the risks posed to banks.In contrast, banks with higher foreign institutionownership have lower risks.

Monitoring effects within subgroups by the largest

shareholders. Table 5 examines the effect of owner-ship on a bank’s risk-taking behaviour in threesubsets classified by the largest shareholders. Forthe first subgroup in which board members andsupervisors are the largest shareholders, the coeffi-cients of Boardsupr and government are significantlypositive (Boardsupr coefficient¼ 0.039, p50.0001;Government coefficient¼ 0.058, p50.0001 inTable 5, first column). The Government coefficientis also negatively correlated with regulatory capital(coefficient¼�0.041, p¼ 0.004 in Table 5, thirdcolumn). This result indicates that higher insidemanagement ownership and government ownershipare associated with higher overdue loans and lowerregulatory capital when banks’ largest shareholdersare their board members and supervisors.

For the second subgroup in which the foreigninstitution is the largest shareholder, we find that

Bank’s risk-taking and ownership structure 1557

Table

4.Ownership

structure

andbank’srisk-taking

6-m

onth

overdueloan

3-m

onth

overdueloan

Regulatory

Capital

Model

specification

(1a)

(1b)

(1a)

(1b)

(2a)

(2b)

Panel

A:Ownership

isdirectownership

Intercept

30.727(5

0.0001)***

40.372(5

0.0001)***

78.519(5

0.0001)***

84.285(5

0.0001)***

�12.266(0.070)*

�8.512(0.187)

Boardsupr

0.012(0.071)*

�0.039(0.035)**

0.015(0.170)

�0.084(0.107)

�0.014(0.090)*

0.050(0.087)*

Foreign

�0.007(0.255)

�0.044(0.115)

�0.013(0.206)

�0.087(0.063)*

0.012(0.218)

0.002(0.961)

Government

0.022(0.029)**

�0.006(0.931)

0.017(0.271)

0.085(0.436)

0.016(0.110)

0.281(0.008)**

Boardsupr *High

–0.045(0.001)**

–0.086(5

0.0001)***

–�0.053(0.019)**

Foreign*High

–0.034(0.199)

–0.073(0.098)*

–0.018(0.669)

Government *High

–0.033(0.643)

–0.107(0.311)

–�0.258(0.014)**

Optleverage

46.577(0.004)**

54.300(0.001)**

68.713(0.007)**

73.694(0.007)**

�111.296(5

0.0001)***�150.223(5

0.0001)***

Asset

�1.466(5

0.0001)***�1.939(5

0.0001)***

�3.803(5

0.0001)***�4.024(5

0.0001)***

1.336(5

0.0001)***

1.129(0.001)**

Branch

0.014(5

0.0001)***

0.018(5

0.0001)***

0.026(5

0.0001)***

0.030(5

0.0001)***

�0.013(0.030)**

�0.007(0.260)

Jointtest

ofdifferentownership

BoardsuprandInteractionterm

–0.006(0.000)**

–0.002(0.000)**

–�0.003(0.020)**

ForeignandInteractionterm

–�0.010(0.165)

–�0.014(0.142)

–0.020(0.115)

GovernmentandInteractionterm

–0.328(0.020)**

–0.022(0.180)

–�0.023**(0.006)

Observations

650

650

650

650

400

400

Wald�2

93.38***

143.36***

177.03***

244.95***

53.33**

92.77***

LM

statistics

1104.17***

646.46***

1281.87**

830.66***

1012.61***

634.78***

Panel

B:Ownership

isultim

ate

ownership

Intercept

32.485(5

0.0001)***

37.178(5

0.0001)***

79.932(5

0.0001)***

75.264(5

0.0001)***

�12.724(0.070)*

�0.077(0.991)

Ultim

ate

�0.002(0.765)

0.029(0.015)**

�0.006(0.544)

�0.034(0.189)

0.002(0.846)

0.052(0.003)**

Foreign

�0.006(0.279)

�0.061(0.033)**

�0.012(0.033)**

�0.130(0.007)*

0.015(0.176)

0.051(0.176)

Government

0.026(0.010)**

0.034(0.648)

0.028(0.083)*

�0.052(0.626)

0.007(0.486)

0.332(0.002)**

Ultim

ate*High

–�0.022(0.005)**

–0.020(0.133)

–�0.032(0.014)**

Foreign*High

–0.051(0.060)*

–0.108(0.016)**

–�0.016(0.684)

Government *High

–�0.006(0.938)

–0.090(0.385)

–�0.329(0.002)**

Optleverage

41.536(0.009)**

48.594(0.009)**

62.143(0.013)**

67.843(0.001)**

�115.473(5

0.0001)***�177.189(5

0.0001)***

Asset

�1.543(5

0.0001)***�1.767(5

0.0001)***

�3.855(5

0.0001)***�3.560(5

0.0001)***

1.362(5

0.0001)***

0.694(0.052)**

Branch

0.015(5

0.0001)***

0.014(5

0.0001)***

0.026(5

0.0001)***

0.021(5

0.0001)***

�0.015(0.013)**

�0.002(0.780)

Jointtest

ofdifferentownership

Ultim

ate

andInteractionterm

–0.007(0.021)**

–�0.014(0.234)

–0.020(0.013)**

ForeignandInteractionterm

–�0.010(0.070)*

–�0.022(0.015)**

–0.019(0.017)**

GovernmentandInteractionterm

–0.339(0.015)**

–0.038(0.016)**

–0.003(0.008)**

Observations

650

650

650

650

400

400

Wald�2

94.00***

163.47***

178.47***

329.07***

63.45**

169.53***

LM

statistics

1093.72***

886.50***

1287.04**

971.06***

953.66***

971.06***

Notes:

This

table

examines

theeffect

ofownership

heldbyboard

andsupervisors,foreigninstitutionsandgovernmentonbanks’

risk-takingbehaviour.

Thevariable

definitionsare

listed

inTable

2.FGLSestimateswithfirm

-specific

random

effectsare

applied

forparameter

estimation.Wald

testsare

conducted

toexaminethejoint

restrictiononmodel

parameters.

TheLM

statisticsis

theresultofBreusch–PaganLM

test

forrandom

effects.

Heteroscedasticity-autocorrelationadjusted

p-values

are

reported

inparentheses.Allregressionscontain

yeardummiesandaconstantterm

.*,**and***indicate

statisticalsignificance

at10,5and1%

levels,respectively.

1558 S. Chou and F. Lin

Table

5.Ownership

structure

andbank’srisk-takingbylargestshareholder

Largestshareholder

Boardsupr

Foreign

Government

Dependent

variable

6-m

onth

overdue

3-m

onth

overdue

Regulatory

Capital

6-m

onth

overdue

3-m

onth

overdue

Regulatory

Capital

6-m

onth

overdue

3-m

onth

overdue

Regulatory

Capital

Model

specification

(1a)

(1a)

(2a)

(1a)

(1a)

(1b)

(1a)

(1a)

(2a)

Intercept

44.721(50.0001)***

107.919(50.0001)***

0.370(0.966)

11.267(0.001)**

15.944(0.002)**

–2.995(0.891)

–47.164(0.005)**

–91.765(50.0001)***

–20.003(0.483)

Boardsupr

0.039(50.0001)***

0.020(0.241)

0.017(0.243)

–0.007(0.127)

–0.008(0.257)

–0.019(0.423)

0.128(0.006)**

0.240(0.034)**

–0.001(0.994)

Foreign

–0.002(0.912)

0.013(0.669)

0.027(0.209)

–0.006(0.031)**

0.007(0.135)

–0.016(0.361)

–0.033(0.007)**

–0.070(0.006)**

–0.100(50.0001)***

Government

0.058(50.0001)***

0.078(0.001)**

–0.041(0.004)**

0.076(0.002)**

0.079(0.021)**

–0.021(0.448)

–0.106(0.037)**

–0.227(0.065)*

0.013(0.887)

Optleverage

153.368(50.0001)***

153.651(50.0001)***

–127.694(50.0001)***

51.609(50.0001)***

52.416(0.001)**

–202.902(50.0001)***

368.978(50.0001)***

1005.226(50.0001)***

529.508(0.011)

Asset

–2.286(50.0001)***

–5.389(50.0001)***

0.652(0.156)

–0.521(0.003)**

–0.711(0.008)**

1.157(0.301)

2.313(50.0001)***

4.300(50.0001)***

1.342(0.318)

Branch

0.018(0.001)**

0.040(50.0001)***

–0.011(0.049)**

–0.003(0.215)

–0.006(0.150)

–0.051(0.001)**

–0.028(50.0001)***

–0.058(50.0001)***

–0.044(0.175)

Observations502

502

314

117

117

67

31

31

20

Wald�2

166.34***

211.01***

40.57***

36.64***

27.62***

74.32***

173.32***

443.96***

21.15**

LM

statistics829.45***

1082.89**

362.95***

41.25***

51.63***

56.18***

28.26**

32.28***

0.28

Notes:Thistableclassifiesthesamplesinto

threesubsetsbythetypeoflargestshareholdersandexamines

theeffect

ofownership

onbanks’risk-takingbehaviourin

thethree

subsets.Thevariable

definitionsare

listed

inTable

2.FGLSestimateswithfirm

-specific

random

effectsare

applied

forparameter

estimation.Wald

testsare

conducted

toexaminethejointrestrictiononmodelparameters.TheLM

statisticsistheresultofBreusch–PaganLM

testforrandom

effects.Heteroscedasticity-autocorrelationadjusted

p-values

are

reported

inparentheses.Allregressionscontain

yeardummiesandaconstantterm

.*,**and***indicate

statisticalsignificance

at10,5and1%

levels,respectively.

Bank’s risk-taking and ownership structure 1559

the coefficient of Foreign is significantly negative(coefficient¼�0.006, p¼ 0.031 in Table 5, fourthcolumn). The coefficients of Government are signi-ficantly positive for the 6-month overdue loan(coefficient¼ 0.076, p¼ 0.002 in Table 5, fourthcolumn) and for the 3-month overdue loan(coefficient¼ 0.079, p¼ 0.021 in Table 5, fifthcolumn). However, the coefficients of Boardsuprin the second subgroup are all insignificant. For thethird subgroup in which the government is thelargest shareholder, we find that the coefficientsof Boardsupr on the overdue loan are signifi-cantly positive (coefficient¼ 0.128, p¼ 0.006 for the6-month overdue loan; coefficient¼ 0.240, p¼ 0.034for the 3-month overdue loan in Table 5). At the sametime, the coefficients of Foreign and Government areall significantly negative on the overdue loan.

Overall, the findings in Table 5 agree with thesummary statistics shown in Table 3 Panel C in whichthe subgroup with the largest ownership of boardmembers and supervisors has the highest overdueloan (6.11% for the 6-month overdue loan and 9.08%for the 3-month overdue loan) and lowest regulatorycapital (9.84%). In contrast, the subgroup with thelargest foreign institutions exhibited the lowest over-due loan (2.05% for the 6-month overdue loan and2.70% for the 3-month overdue loan) and highestregulatory capital (13.04%). The results imply thata higher inside management ownership and highergovernment ownership are related to a higher risk.In contrast, a higher foreign institution ownership isassociated with a lower risk.

In addition, there are some notable results. First, inthe subsets whose largest shareholders are foreigninstitutions, the inside management ownerships areall insignificant, indicating that foreign institutionsmay contest inside management and alleviate theirrisk-taking behaviour. Second, government owner-ship is negatively related to overdue loans in thesubset in which the largest shareholders come fromthe government. The explanation for this phenome-non is that the Taiwanese government has madeefforts to reduce bad debts during recent financialreforms. Therefore, the government became moreinfluential in reducing overdue loans when it is thelargest shareholder.

Relative governance strength and bankrisk-taking behaviour

In light of the increasing importance of foreigninstitution ownership and its debatable role inextant literature, this study further analyses howforeign institution ownership affects a bank’s risk-taking behaviour. Figure 2 illustrates the decreasing

trend of overdue loan and the increasing trendof regulatory capital as the governance strength offoreign institutions increases.

Table 6 takes the perspective of the relativegovernance strength of board members and foreigninstitutions. Recall that Foreignd is a dummy variableequal to one, indicating foreign institutions’ position.As shown in Table 6, the coefficients of the inter-action term of MAX and Foreignd are all significantlynegative (p¼ 0.022 in the second column, p¼ 0.008 inthe fourth column, P¼ 0.014 in the sixth column,and P¼ 0.020 in the last column). The joint test ofcoefficients of MAX and the interaction term arealso significantly negative (p¼ 0.073 in the secondcolumn, p¼ 0.018 in the fourth column, p¼ 0.036 inthe sixth column and p¼ 0.062 in the last column).These phenomena suggest that banks will have feweroverdue loans when their foreign institution ownershave higher relative governance strength than insidemanagement. This finding is consistent with theresults presented in Table 5 in which we find thatthe foreign institution owner may contest insidemanagement when the largest shareholders consistof foreign institutions.

Table 7 presents the details on the association ofregulatory capital and the relative governance powerof ownership. The significantly positive coefficientsof MAX (coefficient¼ 0.504, p¼ 0.011 in the firstcolumn and coefficient¼ 0.517, p¼ 0.028 in thesecond column) demonstrate that owners withhigher governance strength are inclined to maintainmore sufficient capital. However, significantly posi-tive coefficients of MIN show complementary mon-itoring effects by the weaker side of governancestrength as well (coefficient¼ 0.560, p¼ 0.001 in thethird column and coefficient¼ 0.541, p¼ 0.045 inthe last column). Furthermore, the coefficients ofthe interaction terms of MAX and Foreignd aresignificantly positive for both kinds of managerialownership measures (coefficient¼ 0.356, p¼ 0.001 inthe second column and coefficient¼ 0.168, p¼ 0.097in the last column). This result shows that foreigninstitution investors with higher relative governancestrength are associated with sufficient capital.

Control variables

For the control variables shown in Tables 4–7, thecoefficients of Asset are significantly negative foroverdue loans and significantly positive for regula-tory capital, implying that large banks pay muchattention to controlling risks. This may be becauselarger banks have gained more benefits from internaloperation improvements (Carbo et al., 2003) or havemore tangible and intangible resources for risk

1560 S. Chou and F. Lin

Table

6.Overdueloanandrelative

governance

strength

–managerialdirectstakeholder

asinsidemonitorincentive

Directownership

asinsidemonitor

Ultim

ate

ownership

asinsidemonitor

6-m

onth

overdueloan

3-m

onth

overdueloan

6-m

onth

overdueloan

3-m

onth

overdueloan

Model

specification

(3)

(5)

(3)

(5)

(3)

(5)

(3)

(5)

Intercept

35.903(5

0.0001)***

31.730(5

0.0001)***

77.962(5

0.0001)***

72.778(5

0.0001)***

36.139(5

0.0001)***

33.060(5

0.0001)***

75.847(5

0.0001)***

73.071(5

0.0001)***

MIN

0.032(0.771)

0.189(0.404)

�0.050(0.780)

0.171(0.646)

�0.150(0.165)

�0.059(0.741)

�0.345(0.056)*

�0.236(0.431)

MAX

�0.158(0.239)

�0.134(0.399)

�0.574(0.010)**

�0.490(0.058)*

�0.002(0.988)

�0.016(0.904)

�0.199(0.295)

�0.256(0.220)

MIN

*Foreignd

–0.005(0.962)

–0.096(0.607)

–0.046(0.608)

–0.073(0.614)

MAX*Foreignd

–�0.176(0.022)**

–�0.327(0.008)**

–�0.176(0.014)**

–�0.267(0.020)**

Govdummy

0.196(0.658)

0.171(0.714)

�0.081(0.904)

�0.122(�

0.859)

0.428(0.326)

0.115(0.799)

0.312(0.642)

0.040(0.952)

Optleverage

40.556(0.012)**

44.400(0.010)**

42.438(0.057)*

72.353(0.003)**

36.522(0.023)**

35.420(0.029)**

62.893(0.010)**

77.193(0.002)**

Asset

�1.699(5

0.0001)***�1.475(5

0.0001)***�3.645(5

0.0001)***�3.398(5

0.0001)***�1.712(5

0.0001)***�1.546(5

0.0001)***�3.586(5

0.0001)***�3.438(5

0.0001)***

Branch

0.018(5

0.0001)***

0.015(5

0.0001)***

0.028(5

0.0001)***

0.025(5

0.0001)***

0.017(5

0.0001)***

0.017(5

0.0001)***

0.028(5

0.0001)***

0.027(5

0.0001)***

Jointtest

offoreigninstitutionmonitoringeffect

MIN

andInteraction

term

(p-valueofF-test)

–0.194(0.287)

–0.267(0.213)

–�0.013(0.874)

–�0.163(0.724)

MAX

andInteractionterm

(p-valueofF-test)

–�0.310(0.073)*

–�0.817(0.018)**

–�0.192(0.036)**

–�0.523(0.062)*

Observations

650

650

650

650

650

650

650

650

Wald�2

95.98***

93.55***

234.99***

235.57***

93.38***

103.85***

122.06***

223.47***

LM

statistics

996.96***

852.71***

975.60***

817.79***

1058.12***

805.47***

1261.70***

913.71***

Notes:Thistableexamines

theeffect

ofbank’sinternalandexternalrelativegovernance

strength

onbank’sriskingtaking.Thedependentvariablesare

the6-m

onth

overdue

loanrate

andthe3-m

onth

overdueloanrate.Internalgovernance

power

isthelevelofdirectownership

ofboard

andsupervisors.Externalgovernance

power

isthelevelof

ownership

ofbyforeigninstitutions.Thevariable

MIN

denotestheweaker

sideofmonitoringstrength

andcapturesthecomplementary

effect

formonitoringbank’srisk-

taking.MAXdenotesthestronger

sideofmonitoringstrength

andcapturesthesubstitutioneffect

formonitoringbank’srisk-taking.Foreigndisadummyvariableequalto

oneiftheforeigninstitutionlocatesatMIN

orMAXmonitoringcategory.Thevariabledefinitionsare

listed

inTable2.FGLSestimateswithfirm

-specificrandom

effectsare

applied

forparameter

estimation.Wald

testsare

conducted

toexaminethejointsignificance

ofmodelparameters.TheLM

statisticsistheresultofBreusch–PaganLM

test

forrandom

effects(1980).Heteroscedasticity-autocorrelationadjusted

p-values

are

reported

inparentheses.Allregressionscontain

yeardummiesandaconstantterm

.*,**and***indicate

statisticalsignificance

at10,5and1%

levels,respectively.

Bank’s risk-taking and ownership structure 1561

management such that they usually bear heavierregulatory oversight than small banks (Lee, 2004).Meanwhile, the coefficients on Optleverage are signi-ficantly positive for overdue loans and significantlynegative for regulatory capital. The coefficients ofBranch are also significantly positive for overdueloans and significantly negative for regulatory capital.These results suggest that banks with higher operat-ing leverage and more branches are less prudent inrisk control. This finding may be attributed to thefact that most banks in Taiwan with more fixed assetsand branches were originally government owned.Thus, they may be less attentive to granting loans andmaintaining capital sufficiency due to the govern-ment’s implicit guarantee. Tables 4–7 also list thestatistics for model specification. The significantWald �2 and LM statistics demonstrate the appro-priateness of the models presented.

In general, the results are consistent regardlessof the choice of ownership or relative governancestrength of foreign institutions as independent vari-able. This finding is similar to that presented byMajumdar and Nagarajan (1997) and Koh (2003)

who found that institutional owners will be moreactively involved in their invested firms.

V. Robustness Test

To mitigate any bias attributable to cross-sectionaldependence, following the Bernard (1987) methodol-ogy, we estimate annual cross-sectional regressionsfrom 2001 to 2006 and use the estimated slopecoefficient for the six yearly regressions in order toobtain across-year mean coefficients for each vari-able. The results of the significance test for the time-series mean parameter are similar to the core resultslisted in the previous sections.

VI. Conclusion

In recent years, the banking sector in East Asia hasfaced deregulation and has undergone transformation

Table 7. Regulatory capital and relative governance strength

Direct stakeholder as inside monitor Dominant stakeholder as inside monitor

Model specification (4) (6) (4) (6)

Intercept �2.937 (0.701) �9.100 (0.224) �24.383 (50.0001)*** �16.627 (0.015)**MIN 0.162 (0.272) �0.485 (0.153) 0.560 (0.001)** 0.541 (0.045)**MAX 0.504 (0.011)** 0.517 (0.028)** 0.153 (0.342) 0.102 (0.582)MIN*Foreignd 0.175 (0.312) �0.111 (0.441)MAX*Foreignd 0.356 (0.001)** 0.168 (0.097)*Govdummy 0.105 (0.774) 0.343 (0.371) 0.086 (0.821) 0.022 (0.955)Optleverage �186.473

(50.0001)***�167.623

(50.0001)***�150.278

(50.0001)***�145.638

(50.0001)***Asset 0.838 (0.039)** 1.151 (0.004)** 1.972 (50.0001)*** 1.557 (50.0001)***Branch �0.014 (0.022)** �0.015 (0.010)** �0.029 (50.0001)*** �0.024 (50.0001)***

Joint test of foreign institution monitoring effectMIN and Interaction term

(p-value of F-test)�0.310 (0.326) 0.430 (0.075)*

MAX and Interaction term(p-value of F-test)

0.873 (0.002)** 0.270 (0.252)

Observations 400 400 400 400Wald �2 122.06*** 124.63*** 173.88*** 134.79***LM statistics 881.13*** 761.67*** 882.00*** 791.76***

Notes: This table examines the effect of bank’s internal and external relative governance power on bank’s regulatory capital asproxy for bank’s risking taking external governance power is the level of ownership owned by foreign institutions. Thevariable MIN denotes the minimum of the ownership level of foreign institution owner and inside management, and capturesthe complementary effect for monitoring bank’s risk-taking. The variable MAX denotes the maximum of the ownership levelof foreign institution owner and inside management, and captures the substitution effect for monitoring bank’s risk-taking.Govdummy is a dummy variable equal to one if government is the largest owner of bank. The variable definitions are listed inTable 2. FGLS estimates with firm-specific random effects are applied for parameter estimation. Wald tests are conducted toexamine the joint significance of model parameters. The LM statistics is the result of Breusch–Pagan LM test for randomeffects (1980). Heteroscedasticity-autocorrelation adjusted p-values are reported in parentheses. All regressions contain yeardummies and a constant term.*, ** and *** indicate statistical significance at 10, 5 and 1% levels, respectively.

1562 S. Chou and F. Lin

from being government-owned to private institutions.

How does this ownership change affect a bank’s risk-

taking behaviour? This issue has raised awarenessamong policy makers and academic researchers

(Douma et al., 2006). This article examines theassociation between a bank’s ownership structure

and risk-taking behaviour as presented through

overdue loans and regulatory capital. By analysinga sample of 37 banks with 650 quarterly observations,

the results show that banks with higher inside

management ownership and government ownershiphave higher overdue loans and lower regulatory

capital. Meanwhile, banks with higher foreign insti-tution ownership have lower overdue loans and

higher regulatory capital. Especially, the risk-taking

behaviour of inside management is alleviated inbanks whose largest shareholders are foreign institu-

tions, implying that foreign institutions are more

influential than inside management when they ownmore equity.

In general, the results are consistent regardless

of the choice of ownership or relative governancestrength of foreign institutions as independent vari-

able. These findings offer empirical implications

regarding bank governance from two perspectives.A bank’s inside owners with higher control power

seem to be less concerned with risk taking. Foreign

institutions become actively involved in the allevia-tion of overdue loan rates and maintain higher

capital adequacy ratios more apparently when theyhave higher ownership as compared to that of inside

management. The corporate governance of banks

has been emphasized recently to enhance bankingoperations and promote the development of capital

markets. The results imply that more foreign institu-

tion ownerships could be considered as a choice formonitoring mechanism. These results also contribute

to the growing body of evidence for governance inbanking where more governance mechanisms must

be explored in the current transition stage from the

viewpoint of risk control.

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