Is Ownership Structure a Determinant of Bank Efficiency?

When owners could easily sell a company if it is not performing well enough provide additional incentive to the administration to act in the best interest of the stockholders, since in the merger process the actual administration will lose their job (Jensen and Ruback, 1983; Schranz, 1993). It is difficult to test this hypothesis empirically due to the difficulty in measuring some of these concepts. This paper uses cost and profit functions to estimate efficiency at the bank level in Chile. Based on these measures, we explain cross-bank differences over time, which are related to bank size, ownership structure, and other relevant variables. We report two main findings. First, banks that are established as listed companies in Chile tend to show a higher level of efficiency than those established as closed companies. This result holds even after controlling for the bank’s product mix and property origin (domestic versus foreign). Our interpretation of this result is that listed banks have a relatively high probability of takeover in Chile, since the ownership structure is known. Managers therefore act in the best interest of stockholders. Second, banks that have a high property concentration demonstrate a high level of efficiency. The two results together suggest that mitigation of the principal-agent problem is key to explaining bank efficiency.