THE IMPACT OF CHANGES IN BANK OWNERSHIP STRUCTURE AROUND THE WORLD DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Alvaro G. Taboada, CFA, MBA The Ohio State University 2008 Dissertation Committee: Approved by Professor G. Andrew Karolyi, Advisor _______________________ Advisor Professor Isil Erel Graduate Program in Business Administration Professor Kewei Hou Professor Ingrid Werner ii ABSTRACT Large scale bank privatizations over the last ten years have resulted in vast changes in the ownership structure of banking sectors throughout the world. This dissertation explores both the macro and micro level effects of these changes in bank ownership structure. The first essay explores how changes in bank ownership structure affect capital allocation efficiency within countries. I find that the decline in government ownership of banks by itself does not have any impact on capital allocation efficiency; rather, what matters is whether foreigners or large domestic shareholders acquire the stakes relinquished by the government. Increases in domestic blockholder ownership of banks adversely affect the allocation of capital through increased lending activity to less productive industries, while increased foreign presence improves capital allocation efficiency by directing credit to more productive sectors and to industries that rely more on external financing. In the second essay I explore how changes in bank ownership structure affect the performance of individual banks and the banking sector. The primary contribution of this essay is to examine the role of large domestic blockholders on bank performance. I find that increases in large domestic blockholder ownership of banks are associated with poor subsequent performance in terms of asset quality, profitability, and bank value. In iii contrast, increases in foreign ownership lead to improvements in profitability and bank value, consistent with prior findings. Government ownership of banks continues to affect bank performance adversely. Finally, increased presence of large domestic blockholders in the banking sector has a positive spillover effect on banking sector asset quality and profitability, while increased foreign presence is no longer associated with improvements in the competitiveness of the banking sector, contrary to what prior studies have found. iv To my parents, Dr. Alvaro J. Taboada and Esther M. Taboada v ACKNOWLEDGMENTS I would like to thank my committee members G. Andrew Karolyi (Committee Chair), Isil Erel, Kewei Hou, and Ingrid Werner for their invaluable comments and continued encouragement and support throughout this process. I am also deeply indebted to René Stulz, Roger Loh, my colleagues, and all seminar participants at The Ohio State University for their insightful and helpful comments and suggestions. Finally, special thanks to José F. Alvarez at Banco Sabadell, and to Mitch Gouss at Bureau van Dijk, who provided access to key data used in this dissertation. vi VITA October 15, 1973…………………………………….Born in León, Nicaragua 1995…Bachelor of Business Administration, Florida International University, Miami, FL 1997……Master of Business Administration, University of Notre Dame, Notre Dame, IN 1997-2003… International Bank Examiner, Federal Reserve Bank of Atlanta, Miami, FL FIELDS OF STUDY Major Field: Business Administration Concentration: Finance vii TABLE OF CONTENTS ABSTRACT ii ACKNOWLEDGMENTS v VITA vi LIST OF TABLES x LIST OF FIGURES xii CHAPTER 1: INTRODUCTION 1 CHAPTER 2: THE IMPACT OF CHANGES IN BANK OWNERSHIP STRUCTURE ON THE ALLOCATION OF CAPITAL 6 2.1. Introduction 6 2.2. Literature Review 10 2.2.1. Empirical Evidence on Government Ownership of Banks 10 2.2.2. Empirical Evidence on Foreign Ownership of Banks 13 2.2.3. Contribution of this Study 16 2.3. Data and Methodology 17 2.4. Changes in Bank Ownership Structure 25 2.4.1. Current State of Bank Ownership Structure around the World 25 2.4.2. Changes in Bank Ownership Structure and Country Characteristics 29 2.5. Bank Ownership Structure and the Allocation of Credit 32 2.5.1. Changes in Bank Ownership Structure & Credit Growth 32 viii 2.5.2. Changes in Bank Ownership Structure and Credit Allocation Efficiency 34 2.5.3. Addressing Endogeneity Concerns 37 2.5.4. Impact of Changes in DB – Testing Alternative Hypotheses 39 2.5.5. Credit Growth to Industries with High Dependence on External Financing 42 2.6. Bank Ownership Structure and the Allocation of Capital 46 2.6.1. Additional Robustness Tests 51 2.7. Conclusion 52 CHAPTER 3: DOES THE GROWING PRESENCE OF LARGE DOMESTIC BLOCKHOLDERS AROUND THE WORLD AFFECT BANK PERFORMANCE? 54 3.1. Introduction 54 3.2. Literature Review 58 3.2.1. Empirical Evidence on State Ownership of Banks 58 3.2.2. Empirical Evidence on Foreign Ownership of Banks 60 3.2.3. Contribution of this Study 62 3.3. Data and Methodology 63 3.3.1. Bank Performance Measures 67 3.4. Bank Ownership and Bank Performance 68 3.4.1. Changes in Bank Ownership and Bank Performance 69 3.4.2. Bank Ownership and Bank Performance – Q measure of performance 74 3.5. Spillover Effects of Changes in Bank Ownership Structure 77 3.6. Conclusion 82 CHAPTER 4: CONCLUSION 84 LIST OF REFERENCES 87 APPENDIX A CREDIT DATA SOURCES 93 APPENDIX B DESCRIPTION OF INDUSTRIES FOR CREDIT DATA 98 ix APPENDIX C EXAMPLE OF OWNERSHIP VARIABLE CONSTRUCTION 99 APPENDIX D TABLES 101 APPENDIX E FIGURES 141 x LIST OF TA BLES Table 1: Summary statistics 101 Table 2: Ownership of banks around the world: 1995, 2000, and 2005 103 Table 3: Changes in bank ownership structure between 1995 and 2005 107 Table 4: Changes in bank ownership and country characteristics 109 Table 5: Which countries experienced more changes in bank ownership structure? 110 Table 6: Effect of changes in bank ownership structure on industry credit growth 114 Table 7: Effect of changes in bank ownership structure on the allocation of credit 115 Table 8: Regressions using instrumental variables for changes in bank ownership 117 Table 9: Testing the impact of domestic blockholder ownership of banks 119 Table 10: Credit growth in industries by extent of dependence on external finance . 121 Table 11: Descriptive statistics - measures of capital allocation efficiency 122 Table 12: Impact of changes in bank ownership structure on capital allocation- instrumental variables approach 124 Table 13: Regressions using new measure of capital allocation efficiency 127 Table 14: Descriptive statistics - banks with available data by year 128 Table 15: Impact of changes in bank control on bank performance – Heckman Model 129 Table 16: Changes in control and bank value 133 [...]... around the world in 1995 Since then, the average government ownership of banks (GB) has declined significantly, dropping to 21% as of 2005 Bank privatizations in the former socialist countries, including Romania, Bulgaria, Hungary, and Poland, have led the way in the latest wave of bank privatizations around the world While privatizations in these countries have led to an increase in foreign ownership of. .. the ownership structure of the largest (top ten) banks in 90 countries - and by examining two aspects of these changes that have not been adequately explored thus far In CHAPTER 2, I explore some macro level implications of the changes in bank ownership structure In particular, I examine how changes in bank ownership structure affect capital allocation efficiency CHAPTER 3 explores how changes in bank. .. with prior findings, I also find a positive impact of increases in foreign ownership of banks on profitability and operational efficiency I also confirm prior findings associated with the poor performance of government-owned banks Furthermore, increases in domestic blockholder ownership of banks appear to improve the asset quality and profitability of the banking sector Contrary to prior findings, foreign... effects of changes in bank ownership structure – Instrumental Variable (IV) approach 136 xi LIST OF FIGURES Figure 1: Changes in bank ownership structure 141 xii CHAPTER 1: INTRODUCTION A new wave of bank privatizations in the past decade has significantly changed the ownership structure of banking systems around the world These privatizations were perhaps in part driven by the well... on the discussion on the existing literature on bank ownership Section 2.3 describes the data and methodology used in the study Section 2.4 describes the current state of bank ownership structure around the world and explores the characteristics of countries that have experienced the most drastic changes in bank ownership structure Section 2.5 explores the link between bank ownership structure and the. .. presence in the banking sector; yet, this has not been explored in the literature thus far.5 I examine whether the large declines in government ownership of banks improve the efficiency of capital allocation Bank privatizations should reduce the politically-motivated lending practices that adversely affect capital allocation Surprisingly, I find that the decline in government ownership of banks by... improve the competitiveness of the domestic banking sector 5 CHAPTER 2: THE IMPACT OF CHANGES IN BANK OWNERSHIP STRUCTURE ON THE ALLOCATION OF CAPITAL 2.1 Introduction Government ownership of banks has been consistently declining since 1970 This pattern has accelerated over the past ten years La Porta, Lopez-de-Silanes, and Shleifer (2002a) document that government ownership of banks was still prevalent around. .. allocation of bank credit, Section 2.6 examines the impact of changes in bank ownership structure on a broader measure of capital allocation efficiency, and Section 2.7 concludes 2.2 Literature Review 2.2.1 Empirical Evidence on Government Ownership of Banks The existing literature on government ownership of banks has documented that this form of ownership was pervasive around the world as of 1995, is... allocation The other variables used in the study will be described later in the analysis Given the consolidations in the banking industries of several countries as well as data availability issues, some countries in the sample have less than 10 banks.10 All countries in the sample have at least four banks with available ownership information, with the exception of Iraq (with only two banks as of 1995).11 The. .. presence in poor countries This essay expands on these studies by analyzing how changes in the overall bank ownership structure (including the presence of large domestic blockholders) affect the efficiency of the allocation of capital primarily through the banks’ role in supplying credit 2.3 Data and Methodology To analyze the role of bank ownership structure on capital allocation, I follow La Porta . resulted in vast changes in the ownership structure of banking sectors throughout the world. This dissertation explores both the macro and micro level effects of these changes in bank ownership structure. . THE IMPACT OF CHANGES IN BANK OWNERSHIP STRUCTURE AROUND THE WORLD DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate. implications of the changes in bank ownership structure. In particular, I examine how changes in bank ownership structure affect capital allocation efficiency. CHAPTER 3 explores how changes in bank ownership