Ownership structure and bank risk-taking: the case of Vietnam

This study is to analyze the impact of ownership concentration and of various types of shareholders on the risk-taking behavior of Vietnamese joint-stock commercial banks using a panel data of the period 2010-2017.

International Journal of Management Volume 11, Issue 03, March 2020, pp 427-434 Article ID: IJM_11_03_045 Available online at http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=11&IType=3 Journal Impact Factor (2020): 10.1471 (Calculated by GISI) www.jifactor.com ISSN Print: 0976-6502 and ISSN Online: 0976-6510 © IAEME Publication Scopus Indexed OWNERSHIP STRUCTURE AND BANK RISKTAKING: THE CASE OF VIETNAM *Long Hau LE College of Economics, Can Tho University, Vietnam (Postal Address: College of Economics, Can Tho University, Campus II, 3/2 street, Ninh Kieu district, Can Tho city, 900000, Vietnam) Thanh Hoang PHAM College of Economics, Can Tho University, Vietnam Tan Nghiem LE College of Economics, Can Tho University, Vietnam *Corresponding Author ABSTRACT This study is to analyze the impact of ownership concentration and of various types of shareholders on the risk-taking behavior of Vietnamese joint-stock commercial banks using a panel data of the period 2010-2017 In line with the literature, results from a panel regression with fixed effects show that as the ownership concentration increases, the risk-taking behavior of the bank also increases With regard to the impact of various types of shareholders, the results show that the institutional and foreign shareholders ownership can reduce the bank risk-taking behavior CEO and individual shareholder ownership also seem to have a negative impact on the bank risk-taking behavior, however the statistical test does not support for this relation Findings from this study are supported by the real situation of the Vietnamese economy From these results, a number of policy recommendations are put forward Keywords: Bank shareholders, Risk-taking behavior, Ownership concentration, Vietnam JEL Classifications: G21; G38; G18 Cite this Article: Long Hau LE, Thanh Hoang PHAM and Tan Nghiem LE, Ownership Structure and Bank Risk-Taking: The Case of Vietnam, International Journal of Management, 11 (3), 2020, pp 427-434 http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=11&IType=3 INTRODUCTION In an economy, the banking system plays a very important role in transferring capital to the economy A healthy banking system will contribute to the economic development and vice http://www.iaeme.com/IJM/index.asp 427 editor@iaeme.com Long Hau LE, Thanh Hoang PHAM and Tan Nghiem LE versa, the weak banking system will adversely affect the whole economy For example, the consequences of the weakened banking system were verified by the Asian financial crisis in 1997, or by the world economic crisis in 2007 and 2008 followed by the bankruptcy of corporations and major banks The causes of the recession and crisis are given as the mutual lending in corporations whose branches are banks, or as the increasing cross-ownership of banks, etc Considering these facts, it is important to consider the impact of ownership structure on the efficiency of the banking system This is because the ownership structure of a bank may have influences on its risk profile, since it determines whether managers have the appropriate power and authority to make the right decisions on the businesses Stemming from the importance of this issue, a large number of empirical studies have been conducted, focusing on the two aspects of the ownership structure, i.e the impact of a concentrated and dispersed ownership structure on the risk-taking behavior of the banking system (e.g., Bouwens and Verriest (2014), Srairi (2013), Barry et al (2011), Laeven and Levine ( 2009), Bolton et al (2011), Houston et al (2010), etc.) The Vietnamese banking system with majority of small banks can be characterized as being very much volatile and high risk of insolvency Recently, banks have been quickly increasing their charter capital, especially after the Decree No 141/2006/ND-CP of the government stipulating the minimum legal capital of commercial banks up to VND 3,000 billion The rapid increase of capital of banks in the system within a short time has led to the cross and multilateral ownership structure between either banks and corporations or banks and banks These problems generate a lot of bad debts, especially systematic risks due to liquidity problems Thus, an analysis of the impact of ownership structure of the bank on its risk profile becomes significant, especially at this stage of the restructuring of the banking system in Vietnam Up to my knowledge, such a study has not yet been implemented This research aims at filling this gap of the literature The structure of the paper is organized as follows Section reviews the literature on the impact of ownership structure on bank risk-taking behavior The research methodology is described in section 3, followed by data in section Section presents the empirical results Finally, we provide some concluding remarks and policy recommendations in section LITERATURE REVIEW Numerous theoretical and empirical attempts have been conducted to analyze the determinants of bank risk taking Agency theory by Jensen and Meckling (1976) postulates that conflicts between managers and shareholders induce risk taking behavior According to the theory, managers have less incentive to take high risk since they like to protect their position and personal benefits, meanwhile that is not the case for shareholders with a diversified portfolio after collecting funds bondholders and depositors (Esty, 1998; Galai and Masulis, 1976) This agency problem in firms, nevertheless may be alleviated with concentrated ownership structure, since managers are strictly monitored and even replaced by controlling shareholders in the case of poor performance (Franks, Mayer, and Renneboog, 2001) Therefore, firms with concentrated ownership are expected to take more risk than those with dispersed ownership structure Grounded on this theoretical background, a number of empirical studies on the topic have been implemented Some studies such as Laeven and Levine (2009); Haw, Ho, Hu, and Wu (2010), show supporting evidence for the theory that banks with more powerful owners (i.e concentrated ownership control) tend to take greater risks Inversely, other studies reveal a negative association between ownership concentration and risk, contradicting to the theory E.g., Srairi (2013) for the Middle East and North Africa; Shehzad, De Haan, and Scholtens (2010) for 50 countries averaged over 2005–2007 Furthermore, examining the relation between http://www.iaeme.com/IJM/index.asp 428 editor@iaeme.com Ownership Structure and Bank Risk-Taking: The Case of Vietnam managerial ownership and bank risk, Saunders et al (1990); Bouwens and Verriest (2014) show that shareholder-controlled banks tend to take more risk than those with managerial ownership The reason is that shareholders have diverse portfolios, motivating to be more risky to achieve higher expected returns, while managers have less incentive to take risk as they protect their personal position and interests For examples, Saunders et al (1990), Bouwens and Verriest (2014) show a negative relationship between CEO ownership and bank risk Also, the type of shareholders could influence the risk-taking behavior of banks As shown by Srairi (2013) and Barry et al (2011), banks owned by individual shareholders are most likely to have less diversified portfolios, hence they tend to take less risk to ensure their survival at the long term Moreover, these banks often have smaller portfolios, leading to a lower risk (Anderson et al., 2003) Concerning the impact of foreign ownership on the bank risk, Lee (2008) finds a negative association between the percentage of shares held by the foreigners and the risk of the Korean banking system This negative relation is explained by the fact that foreign investors often invest in stable and high liquid cash flows In addition, institutional shareholders may also shape the nature of corporate risk taking, since they are more expertise in processing information and monitoring managers On the one hand, due to the economies of scale in corporate supervision, institutional shareholders can exert greater control on managers On the other hand, given the diversified portfolio of investments, institutional shareholders may have lower incentives to exercise control Empirical evidence finds inconclusive evidence on the effect of control by institutional investors on firm value (Srairi, 2013; Barry et al., 2011) Finally, incentives to risk taking are also influenced by the characteristics of banks comprising of bank size and liquidity (Caprio, Laeven, and Levine, 2007; Paligorova, 2010) and economic conditions such as economic growth and inflation (La Porta et al., 1998; La Porta, Florencio, Andrei, and Robert, 2002; Bouwens and Verriest, 2014; Srairi, 2013) RESEARCH METHODOLOGY Following the literature (see e.g., Bouwens and Verriest (2014); Laeven and Levine (2009)), the empirical model to investigate the impact of ownership concentration on bank risk is presented as follows: Yit = α + β1CONCit + β2SIZEit + β3ROAit + β4LDRit + β5GGDPit + β6CPIit + εit (1) where, α is constant; βs is the estimated coefficients; i is individual bank, t denotes time; CONC symbolizes ownership concentration; SIZE represents for firm size; ROA is returns on assets; LDR denotes liquidity ratio; GGDP is economic growth rates; CPI displays inflation rates; 𝜀𝑖𝑡: random errors Dependent variable (Y) is Z-score, measured by the summation of ROA and CAR (capital adequate ratio) divided by standard deviation of ROA This variable reflects for the degree of bank risk, where a higher Z-score indicates that the bank has a lower risk Expressing in the formula form: Z-score = (ROA + CAR)/σROA Definition of all independent variables is as follows: CONC is defined as the percentage of shareholdings by the largest shareholder in a bank; SIZE is measured by the natural logarithm of total assets; LDR is the ratio of total outstanding loans divided by total deposits; ROA is calculated by the ratio of after-tax profits divided by total assets; GGDP is growth rate of gross domestic product and IR is annual inflation rates As with several previous studies (e.g., Saunders et al (1990); Srairi (2013); Barry et al (2011)), the impact of different types of ownership on the bank risk is also examined using the equation (2): http://www.iaeme.com/IJM/index.asp 429 editor@iaeme.com Long Hau LE, Thanh Hoang PHAM and Tan Nghiem LE Yit = α + β1CEOit + β2INDIit + β3COMPANYit + β4FOREIGNit + β5SIZEit + β6ROAit+ β7LDRit + β8GGDPit + β9CPIit + εit (2) where, all notations are the same as in equation (1); CEO symbolizes shareholdings of CEO; INDI represents for individual shareholdings; COMPANY denotes institutional shareholdings; FOREIGN symbolizes foreign shareholdings; ROA is returns on assets; LDR denotes liquidity ratio; GGDP is economic growth rates; CPI displays inflation rates; 𝜀𝑖𝑡: random errors In equation (2), while SIZE, ROA, LDR, GGDP and CPI are measured as in equation (1), the other variables are defined as follows: CEO is measured by the percentage of shares owned by CEO; INDI is the total percentage of shares owned by all individual shareholders; COMPANY is calculated by taking the total percentage of shares owned by all institutional shareholders and FOREIGN is the total percentage of shares owned by all foreign shareholders Regression model with panel data is estimated by both the fixed effects method (FEM) and random effects method (REM), and the appropriate method is selected using Hausman test Multicollinearity of the regression is tested by VIF (Variance Inflation Factor) In addition, the tests related to the reliability of the regression model are also appropriately carried out DATA Data are collected from the annual audited financial reports of 26 Vietnamese Joint Stock Commercial Banks during 2010 – 2017 The number of banks in the sample only accounts for about 83.87% of the bank population in Vietnam at the end of 2017 due to the data availability Macro economic variables are collected from the General Statistics Office of Vietnam (GSO) EMPIRICAL RESULTS 5.1 Descriptive Statistics and Correlation Analysis Descriptive statistics for all variables are presented in TABLE As can be seen from the table, the average shareholding of the largest shareholder (CONC) is approximately 24% The CEO of banks holds on average about 0.52% of total bank shares While the average shareholding of individual shareholders is approximately 42%, that of institutional shareholders is about 54% For foreign shareholders, the average ownership accounts for about 11% Table Descriptive Statistics of All Variables Variable Unit Mean Std Min Max CONC % 23.96 24.31 4.08 100,00 CEO % 0.52 1.49 0.00 6.99 INDI % 42.21 27.11 0.00 97.45 FOREIGN % 10.72 11.82 0.00 30,00 COMPANY % 53,72 27.50 0.00 100,00 ASSETS VND Bil 167,433 210,331 12,627 1,202,283 ROA % 0.80 0.83 -5.99 5.54 LDR % 61.50 16.03 16.73 99.45 GGDP % 6.13 0.52 5.25 6.81 CPI % 6.81 5.30 0.63 18.58 TABLE shows the correlation coefficients between independent variables in the regression model In general, all the correlation coefficients between independent variables in both equation (1) and (2) have absolute values less than 0.8, indicating that multicollinearity is not a serious problem affecting the estimation results of the model (Gujarati, 2004) http://www.iaeme.com/IJM/index.asp 430 editor@iaeme.com Ownership Structure and Bank Risk-Taking: The Case of Vietnam Table Correlation Matrix of Variables Variable CONC CEO INDI COMPANY CONC CEO INDI COMPANY FOREIGN SIZE ROA LDR GGDP 1.00 0.53 0.07 0.38 -0.03 1.00 0.44 -0.40 -0.21 -0,16 -0.15 0.04 -0.04 1.00 -0.81 -0.18 -0.47 -0.20 -0.20 -0.01 1.00 0.18 0.53 0.24 0.17 0.01 CPI 0.07 -0.09 -0.13 0.08 FOREI GN SIZE ROA LDR GGDP 1.00 0.34 -0.03 0.06 0.09 1.00 -0.08 0.19 0.12 1.00 0.12 0.12 1.00 0.11 1.00 -0.11 -0.19 0.39 -0.15 -0.28 CPI 1.0 5.2 Regression Results and Discussions The estimation results from equation (1) and (2) are presented in TABLE Using the Hausman test to choose between FEM and REM, the results show that the FEM model is more appropriate Therefore, the two equations are estimated by FEM Besides, the Wald statistics for a groupwise heteroskedasticity diagnostics test are highly statistically significant at the one percent level, indicating that significant heteroskedasticity across banks is present In addition, the Wooldridge test for autocorrelation also shows that the first order autocorrelation over time exists Hence, the regression model is estimated by taking into account this heteroskedasticity and autocorrelation, that is, using cluster-robust standard errors, clustering by the panel variable As can be seen from the table, in equation (1) three independent variables, i.e ownership concentration (CONC), bank size (SIZE) and liquidity (LDR), are statistical significance at the level of 1% to 5%, meanwhile the other variables are not statistically at traditional levels Noticeably, the variable of ownership concentration (CONC) is negatively significant at the 5% level, indicating that the ownership concentration is negatively related to Z-score of the bank This means that the larger ownership the shareholder has the greater the risk of the bank takes, and vice versa These results are consistent with previous studies (Bouwens and Verriest, 2014; Laeven and Levine, 2009) These results could be explained by the fact that the shareholders with a majority stake have the dominant rights to vote on the bank governance structure, thus they may direct bank managers to invest in high risk projects to maximize their profits These findings are, in fact, supported by the real situation of Vietnam Particularly, over last year some banks mainly controlled by one or a few shareholders were put under a strict supervision by the State Bank of Vietnam due to the high rate of non-performing loans and illiquidity An example of this is the case of two joint-stock commercial banks, i.e Construction Bank (CB) and Asian Commercial Banks (ACB) Regarding the equation (2), four independent variables are statistical significance at the 5% to 10% levels, i.e Institutional shareholder ownership (COMPANY), foreign shareholder ownership (FOREIGN), bank size (SIZE) and liquidity LDR), while all the other variables are not statistically significant at the traditional levels It can be seen from the results that the variable of COMPANY is positively correlated with Z-score at the 5% significance level, showing that the institutional shareholder ownership has a positive impact on the bank risk More specifically, as the ownership of institutional shareholder increases, the risk of the bank decreases, and vice versa These results are in line with the arguments put forward by previous studies (Srairi (2013); Barry et al (2011)) As for the foreign shareholder ownership variable http://www.iaeme.com/IJM/index.asp 431 editor@iaeme.com Long Hau LE, Thanh Hoang PHAM and Tan Nghiem LE (FOREIGN), the estimated coefficient is positively significant at the 5% level This result shows a positive association between foreign shareholder ownership and the bank’s Z-score, implying that the greater foreign shareholder ownership the bank has, the lower the risk the bank takes, and vice versa Again, these findings are in line with the previous studies such as Lee (2008) In fact, the importance of foreign shareholder ownership for the Vietnamese banks can be seen through the fact that the last period has witnessed a strong wave of seeking for strategic foreign partners by banks as a way among others to improve their risk management capacity Interestingly, the estimated coefficient of CEO ownership (CEO) and individual shareholder ownership (INDI) is positive as predicted by previous studies (Saunders et al., 1990; Bouwens and Verriest, 2014; Srairi, 2013; Barry et al., 2011), although not being statistically significant at the traditional levels Table Regression Results of Equation (1) and (2) (1) -0,664** (0,254) CONC (2) 0.045 (0.576) 0.072** COMPANY (0.036) 0.014 INDI (0.026) 0.210** FOREIGN (0.008) -9,185*** -4,806* SIZE (2,522) (2,543) 0.567 0.319 ROA (1,729) (1,041) 0.199*** 0.113* LDR (0.059) (0,744) 0.059 -0,686 GGDP (1,469) (1,256) 0.077 -0,055 CPI (0.1138) (0,165) 333,825*** 178,672** Constant (81,781) (78,747) N 169 130 R 0.332 0.226 F-test 4.42*** 23.27*** 16.69** 11.34** Hausman test (2) 6583.40*** 523.60*** Wald test for heteroscedasticity (2) Wooldridge test for autocorrelation (F) 23.37*** 9.77*** Notes: the notations *, ** and *** denote the significance levels of 10%, 5% and 1%, respectively; standard errors are robust standard errors after correcting for heteroskedasticity shown in parentheses CEO http://www.iaeme.com/IJM/index.asp 432 editor@iaeme.com Ownership Structure and Bank Risk-Taking: The Case of Vietnam Taking a look at the control variables, bank size and liquidity are consistently statistically significant at the 1% to 10% levels for both equation (1) and (2), meanwhile the others are not statistically significant at any traditional levels CONCLUSION AND POLICY RECOMMENDATIONS Grounded on the agency theory, the economic literature predicts that conflicts between shareholders and managers may influence the risk-taking behavior of commercial banks This study investigates the impact of ownership concentration and of various types of shareholders on the risk-taking behavior of Vietnamese joint-stock commercial banks using a panel data of the period 2010-2017 In line with the literature, results from a panel regression with fixed effects show that as the ownership concentration increases, the risk-taking behavior of the bank also increases With regard to the impact of various types of shareholders, the results show that the institutional and foreign shareholders ownership can reduce the bank risk-taking behavior CEO and individual ownership also seem to have a negative impact on the bank risk-taking behavior, however the statistical test does not support for this relation These findings are consistent with the real situation of Vietnamese economy From these results, a number of policy recommendations are put forward For policy makers and regulators of the banking system, since the ownership concentration may have positive impact on the risk-taking behavior of the bank, restrictions on shareholdings should be imposed to reduce the ownership concentration in banks Additionally, given that the institutional and foreign shareholders can alleviate the bank risk-taking behavior, legal frameworks to encourage their investment in the banking systems with a moderate restriction on shareholdings may help For commercial banks, they should be open to institutional and foreign shareholders as a way to improve their risk management capacity In order to attract more institutional and foreign investors, commercial banks should be more transparency and effective in their businesses REFERENCES [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] Anderson, RC, SA Mansi and DM Reeb (2003) Founding family ownership and the agency cost of debt Journal of Financial Economics, 68: 263-285 Barry, TA, L Lepetit and A Tarazi (2011) Ownership structure and risk in publicly held and privately owned banks Journal of Banking and Finance , 35: 1327-1340 Bolton, P., H Mehran and J Shapiro (2011) Executive compensation and risk taking Working paper , http, // ssrn.com/abstract=1635349 Bouwens, J and A Verriest (2014) Putting Skin in the Game: Managerial ownership and bank risk-taking Working Paper 14-070 Harvard Business School Caprio, G., Laeven, L., and Levine, R (2007) Governance and bank valuation Journal of Financial Intermediation, 16(4), 584-617 Franks, J., Mayer, C., and Renneboog, L (2001) Who disciplines management in poorly performing companies? 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Thus, an analysis of the impact of ownership structure of the bank on its risk profile becomes significant, especially at this stage of the restructuring of the banking system in Vietnam Up to my... branches are banks, or as the increasing cross -ownership of banks, etc Considering these facts, it is important to consider the impact of ownership structure on the efficiency of the banking system... supervision by the State Bank of Vietnam due to the high rate of non-performing loans and illiquidity An example of this is the case of two joint-stock commercial banks, i.e Construction Bank (CB) and Asian