Ownership concentration and market discipline in European banking: Good monitoring but bad influence?
AbstractWe investigate the impact of banks’ ownership concentration on the effectiveness of shareholders’ market discipline. More precisely, we first assess whether the ability of the distance to default to predict banks’ financial distress is affected by the level of ownership concentration (“monitoring” hypothesis). We also assess whether banks’ future financial situation is directly affected by ownership concentration (“influence” hypothesis). Our econometric estimates are conducted on a panel of 77 European banks observed between the first quarter of 1997 and the last quarter of 2005. We find that ownership dispersion reduces the predictive power of the distance to default. The data collected come from three sources: Bankscope, Datastream and Thomson One Banker Ownership. The econometric methodology is based on simple pooled-logit estimates corrected for the clustering effect. Several tests are then conducted to assess the robustness of the results. We also recall that theoretical results do exist to explain why banks’ ownership structure can alter market discipline and the ability of market-derived indicators to predict future financial distresses. This work finally suggests that the empirical literature dealing with market discipline should not focus only on the moral hazard potentially created by bad insurance deposit design, balance sheet opacity or the safety net: the evolution of banks ownership structure might also be an important prudential issue.
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Bibliographic InfoPaper provided by Groupement de Recherches Economiques et Sociales in its series Cahiers du GRES with number 2008-13.
Date of creation: 2008
Date of revision:
market discipline; ownership concentration; banks’ risk taking;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-07-14 (All new papers)
- NEP-BAN-2008-07-14 (Banking)
- NEP-COM-2008-07-14 (Industrial Competition)
- NEP-EEC-2008-07-14 (European Economics)
- NEP-MAC-2008-07-14 (Macroeconomics)
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