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

Shuching Chou and Fengyi Lin

Applied Economics, 2011, vol. 43, issue 12, 1551-1564

Abstract: 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.

Date: 2011
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DOI: 10.1080/00036840903018791

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