Ownership Structure And Conservatism's Impact On Jordanian Bank's Financial Performance

Loay Jarbou, Jamal Abu-Serdaneh and Muhannad Atmeh ()
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Muhannad Atmeh: Arab Open University, Jordan

Journal of Developing Areas, 2018, vol. 52, issue 4, 183-197

Abstract: The banking sector has suffered recently from a series of financial crises that have affected the worlds' financial system's stability. It is argued that the weak financial performance of banks could be due, among other factors, to deficiencies within corporate governance systems in banks, and the lack of conservatism (as conservatism is used to minimize the agency problem). This paper aims to examine the effect of the corporate governance mechanism (ownership structure, bank's characteristics) and conservatism level on the Jordanian commercial banks' performance for the period between 2005-2014. Four ownership structure dimensions are employed-ownership concentration, institutional ownership, foreign ownership and government ownership. Bank characteristics are captured by using size, age and debt-to-equity ratio. The paper used return on assets and return on equity to assess the financial performance, and applied the accrual method and book value-to-market value method as proxies for conservatism. The results showed a significant impact for all of the ownership structure dimensions and bank's characteristics, on the bank's performance, except for the institutional ownership and the banks' age, which showed no impact on performance. The explanation of this exception is that the Jordanian banking sector is essentially built upon family business. The foreign ownership and government ownership have a positive relationship with bank performance, as the high level of foreign ownership indicates high quality investments. Additionally, government ownership usually imposes more controls and minimizes the agency problems. On the other hand, the concentrated ownership and the bank's size showed a negative relationship to the banks' performance, as concentrated investors may abuse their authority. The negative relationship to the banks' size is due to the high cost required from these banks to control and monitor their different branches. In addition, the results suggest a negative impact of conservatism on the bank's performance when utilizing the book value method as the balance sheet accounts are understated, and hidden reserves are created. On the other hand, a positive impact of conservatism on the bank's performance is detected when utilizing the accrual method. This is because conservatism's policy will improve firm's performance by minimizing the investment in the negative net present value projects. Thus, two different methods could have different results as every method adopts a different perspective.

Keywords: Ownership Structure; Conservatism; Bank's Performance; Banks' characteristics (search for similar items in EconPapers)
JEL-codes: G32 G34 L25 M41 O16 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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