Foreign Shareholdings Impact on Efficiency of the Acquired Local Banks in Indonesia
DOI:
https://doi.org/10.6000/1929-7092.2019.08.92Keywords:
Efficiency, foreign shareholdings, corporate governance, agency theory, resource-based theory.Abstract
The motivation of the studies is to investigate the impact of foreign shareholding originated from developed and developing countries on the efficiency of acquired local banks in Indonesia during 2007-2017 by including Corporate Governance as a moderating variable.
Methodology: Using the secondary aggregate data of 29 commercial banks acquired by foreign shareholders, a panel regression model using econometrics methods of GLS, and DEA was applied to examine the effects of percentage of foreign shareholdings on efficiency of the acquired local banks. The main findings; First, percentage of foreign shareholdings positively affecting efficiency of acquired local banks only if the foreign shareholders is originated from developed countries. Second, the level of economic advancement of the country of origin of foreign shareholders has significant effects on the efficiency of the acquired local banks. Third, the increase in the size of the Board of Directors tends to decrease the efficiency of the acquired local banks and fourth, the presence of Foreign Director has a positive moderating effect on strengthening the effect of percentage of foreign shareholdings on the efficiency of the acquired local banks. Overall, the originality of this studies is that the percentage of foreign shareholdings and its country of origin are two combined factors that cannot be separated in affecting the level of efficiency of its acquired local bank and the fact of significant positive moderating effect of Foreign Director. As policy consideration, monetary authority need to perform strict due diligence on prospective foreign shareholders specifically originated from developing countries, advise banks to maintain the existence of Foreign Director and to encourage small local banks to be merged prior to the acquisition by foreign shareholders.
References
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https://doi.org/10.1016/j.jbankfin.2004.06.016
Gedajlovic, E., T. Yoshikawa, and M. Hashimoto. 2004. “Ownership structure, investment behavior and firm performance in Japanese manufacturing industries”. Organization Studies 25 (8):1363–92.
Gupta, Monika, & Namita, Rajput.(2011). “Assessing the efficiency of foreign banks in Indian Context”. Banks and Banks Systems. Vol. 6(2).2011 Business Perspectives.
Hadad, MD. Santoso, W. Mardanugraha, E. and Illyas, D. 2003.” Analisis Efisiensi Industri Perbankan Indonesia: Penggunaan Metode Nonparametrik Data Envelopment Analysis (DEA)”. Jurnal Bank Indonesia
Hajer, Cheni &Anis, Jarboui (2016). “Analysis of the Impact of Governance Bank Performance: Case of Commercial Tunisia”. Journal of Knowledge Economy, pp 1-25. 11 April 2016.
Hasan, I., and K.Merton, 2003. Development and efficiency of the banking sector in Transition economy: Hungarian experience. Journal of Banking and Finance 27:2249-71.
https://doi.org/10.1016/S0378-4266(02)00328-X
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https://doi.org/10.2753/REE1540-496X490201
Hermalin, B. E., & Weisbach, M. S. (2003). “Boards of Directors as an endogenously determined institution: A survey of the economic literature”. FRBNY Economic Policy Review, 4, 7-26
Havrylchyk, O., (2006), Efficiency of the Polish Banking Industry: Foreign versus Domestic Banks, Journal of Banking and Finance, 30, 1975-1996.
https://doi.org/10.1016/j.jbankfin.2005.07.009
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Kim I, Kim J, Kim W, Byun S.(2010).”Foreign Investor and Corporate Governance in Korea Pacific-Basin Finance Journal.; 18, 390-402
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Liang, Q., Xu. P.,Jiraporn. P.(2013).”Board Characteristics and Chinese Bank Performance.”Journal of Banking and Finance. (37). 2953-2968
https://doi.org/10.1016/j.jbankfin.2013.04.018
Lin, X., and Y. Zhang. 2009. “Bank ownership reform and bank performance in China”. Journal of Banking & Finance 33:20–2
https://doi.org/10.1016/j.jbankfin.2006.11.022
Lensink, Robert, R., Meesters, and Naaborg, Iko.(2008).” Bank Efficiency and Foreign Ownership: Do Good Institutions Matter?”, Journal of Banking & Finance 32(5):834-844
https://doi.org/10.1016/j.jbankfin.2007.06.001
María Eugenia, Delfino.2007. “Control Changes and Firm Performance in Banking”, International Journal of the Economics of Business, 14:2, 261-281
https://doi.org/10.1080/13571510701344061
Meyer, K. E., S. Estrin, S. K. Bhaumik, and M. W. Peng. 2009. Institutions, resources and entry strategies in emerging economies. Strategic Management Journal 30:61–80.
https://doi.org/10.1002/smj.720
Ozili, Peterson Kitakogelu, Uadiale, Olayinka.(2017). “Ownership concentration and bank Profitability.” Future Business Journal 3 (2017) 159
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Phung, D. N., and T. P. V. Lee. 2013. Foreign ownership, capital structure and firm performance: Empirical evidence from Vietnamese listed firms. The IUP Journal of Corporate Governance 12 (2):40–58
Rose, P. S. and S. C. Hudgins.(2013).""Bank Management and Financial Services"". New York: McGraw-Hill.
Shaher, T.A., Kasawneh, O., Salem, R. (2011), The Major Factors that Affect Banks’ Performance in Middle Eastern Countries. Journal of Money, Investment and Banking, 20, 101-109
Soba, M., Erem, I., and Ceylan, F. (2016). “The impact of corporate governance practices on bank efficiency: A case of Turkey”. Journal of Suleyman Demirel University Institute of Social Science, 25(3):305–3
Steiner G.A.,and Steiner J.F.(1997).”Business, Government and Society: A Managerial Perspective. New York: Mc Graw-Hill
Yong-Cheol Kim, Sok-Gee Chan,& Eric H. Y. Koh (2016),” Effect of Foreign Shareholdings nd Originating Countries on Banking Sector Efficiency, Emerging Market Finance & Trade”, Routledge, Taylor & Francis Group ISSN 1540-498X
Wahyuni, S., and M. A. Prabowo. 2012.” Corporate control and firm performance: Does the type of owners matter?” Interdisciplinary Journal of Research in Business 2 (3):23-33.
Whitley, R., and P. Kristensen. 1996. “The changing European firm: Limits to convergence”. London: Routledge.
Wiwattanakantang, Y. 2001. “Controlling shareholders and corporate value: Evidence from Thailand”. Pacific-Basin Finance Journal 9:323–62.
https://doi.org/10.1016/S0927-538X(01)00022-1
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Wu, H.-L., C.-H. Chen, and M.-H. Lin. 2007. “The effect of foreign bank entry on the operational performance of commercial banks in the Chinese transitional economy. Post-Communist Economies”. 19 (3):343–57.
https://doi.org/10.1080/14631370701504404
Wu, Ching-Chih; Lin,Bing-Huei; and Yang, Tung-Hsiao.(2016). “How do Agency Problems Affect the Implied Cost of Capital?” .Journal of Reviews on Global Economic.Vol.5. page .210-226
https://doi.org/10.6000/1929-7092.2016.05.18
https://doi.org/10.33119/ERFIN.2018.3.2.2
Adjaoud, Fodil; Zegal, Daniel& Andaleeb, Syed. (2007).""The Effects of Board Quality on Performance: A study of Canadian Firm"". Corporate Governance An International Review 15(4):623-635.
https://doi.org/10.1111/j.1467-8683.2007.00592.x
Allen, F. and Santomero, A. (1998) The Theory of Financial Intermediation. Journal of Banking and Finance, 21, 1461-1485.
https://doi.org/10.1016/S0378-4266(97)00032-0
Altunbas, Yener, Lynne Evans, and Philip Molyneux, 2007, “Bank Ownership and efficiency"" Journal of Money, Credit, and Banking, 33(4), pp.927-954
https://doi.org/10.2307/2673929
Awdeh, A, dan EI Moussawi, C.(2009), ”Bank Efficiency and Foreign Ownership in the Lebanese Banking Sector”, Review of Middle East Economics and Finance,vol.5,issue.2.
https://doi.org/10.2202/1475-3693.1161
Baghat, Sanjay; Bolton, Brian (2008), “Corporate Governance and Firm Performance”, Journal of Corporate Finance”, Vol.14(3), hal.257-273
https://doi.org/10.1016/j.jcorpfin.2008.03.006
Baghat, Sanjay; Bolton, Brian: Romano, Roberta (2007), “The Promise and Peril of Corporate Governance Indices ""Columbia Law Review, Vol.108. No.8 lpp.1803-1882.
https://doi.org/10.2139/ssrn.1019921
Bank Indonesia. Bank Indonesia Regulation No. 14/8/PBI/2012 pertaining Ownership in Commercial Banks. State Gazette of Republic of Indonesia Year 2012 No.144 DPNP Annexure of State Gazette of Republic of Indonesia No. 5327 DPNP.
Bank Indonesia (2012). Circular Letter No 15/4/DPNP pertaining ownership in Commercial Banks.
Bank Indonesia (2015), Indonesia’s Banking Directory, DPIP, Otoritas Jasa Keuangan-Jakarta.
Belkir, Mohammed. (2006). “Board structure, Ownership structure, and Firm Performance: Evidence from Banking”.
Berger, Allan N, and David B. Humphrey, 1997, ""Efficiency of Financial Institutions: International Survey and Directions for Future Research” Forthcoming in European Journal of Operational Research, January 1997. The Wharton School, University of Pennsylvania.
https://doi.org/10.1016/S0377-2217(96)00342-6
Beisland, L. A., Mersland, R., and Randøy, T. (2014). “The Association between Microfinance rating scores and corporate governance: a global survey”. International Review of Financial Analysis, 35(C):268–280
https://doi.org/10.1016/j.irfa.2014.10.012
Bokpin, G. A. (2013). “Ownership structure, corporate governance, and bank efficiency: an empirical analysis of panel data from the banking industry in Ghana. Corporate Governance”: The international journal of business in society, 13(3):274–28
https://doi.org/10.1108/CG-05-2010-0041
Chermian Eforis and Jinn-Yang Uang(2015), “Corporate Governance and Firm Performance: The Moderating Effect of State Ownership” Proceedings 4th Global Business and Finance Research Conference 25 – May2015Melbourne, Australia.
Claessen, Stijn. (2006)."" Corporate Governance and Development"", World Bank Research Observer Volume 21, Issue 1.Pages: 91 – 122
https://doi.org/10.1093/wbro/lkj004
Chhibber, P. K., and S. K. Majumdar. 1999. Foreign ownership and profitability: Property rights, control and the performance of firms in the Indian industry. The Journal of Law and Economics 42:209–38.
https://doi.org/10.1086/467423
Delfino, Maria, Eugene.(2007).”Control Changes and Firm Performance in Banking”. International Journal of Economics of Business.14(2): 261-281
https://doi.org/10.1080/13571510701344061
Dharwadkar, Bavi; George, Gerard; and Brandes, Pamela. Privatization in Emerging Economies: An Agency Perspective. (2000). Academy of Management Review. 25, (3),650-669. Research Collection Lee Kong Chian School Of Business.
https://doi.org/10.5465/amr.2000.3363533
Douma, S., R. George, and R. Kabir. 2006. “Foreign and domestic ownership business Group and firm performance: Evidence from a large emerging market”. Strategic Management Journal 27:637–57.
https://doi.org/10.1002/smj.535
Dunning, J. H. 1988. “The eclectic paradigm of international production: A restatement and some possible extensions”. Journal of International Business Studies 19:1–31.
https://doi.org/10.1057/palgrave.jibs.8490372
Fanta, B. A., Kemal, S. K., & Waka,K. Y. (2013). Corporate Governance and impact on Bank Performance. Journal of Finance and Accounting. Vol. 1, No. 1, 2013, pp. 19-26.
https://doi.org/10.11648/j.jfa.20130101.12
Fiordelisi , Franco, David Marques-Ibanez and Phil Molyneux, 2010, “Efficiency and risk in European Banking”, Working Paper Series No. 1211 / JUNE 2010. European Central Bank.
https://doi.org/10.2139/ssrn.1512619
Frederick, W., Post, J., & St. Davis, K.. (1992). Business and society: Corporate strategy, public policy, ethics. (7th ed.). McGraw-Hill, New York
Fries, S., and A. Taci. 2005. “Cost efficiency of banks in transition: Evidence from 289 Bank in 15 post-communist countries”. Journal of Banking & Finance 29:55–81.
https://doi.org/10.1016/j.jbankfin.2004.06.016
Gedajlovic, E., T. Yoshikawa, and M. Hashimoto. 2004. “Ownership structure, investment behavior and firm performance in Japanese manufacturing industries”. Organization Studies 25 (8):1363–92.
Gupta, Monika, & Namita, Rajput.(2011). “Assessing the efficiency of foreign banks in Indian Context”. Banks and Banks Systems. Vol. 6(2).2011 Business Perspectives.
Hadad, MD. Santoso, W. Mardanugraha, E. and Illyas, D. 2003.” Analisis Efisiensi Industri Perbankan Indonesia: Penggunaan Metode Nonparametrik Data Envelopment Analysis (DEA)”. Jurnal Bank Indonesia
Hajer, Cheni &Anis, Jarboui (2016). “Analysis of the Impact of Governance Bank Performance: Case of Commercial Tunisia”. Journal of Knowledge Economy, pp 1-25. 11 April 2016.
Hasan, I., and K.Merton, 2003. Development and efficiency of the banking sector in Transition economy: Hungarian experience. Journal of Banking and Finance 27:2249-71.
https://doi.org/10.1016/S0378-4266(02)00328-X
Hasan, Ifthekar and Xie,Rue. 2013.”A Note on Foreign Bank Entry and Bank Corporate Governance in China”. Emerging Market Finance and Trade.Vol.49.No.2.
https://doi.org/10.2753/REE1540-496X490201
Hermalin, B. E., & Weisbach, M. S. (2003). “Boards of Directors as an endogenously determined institution: A survey of the economic literature”. FRBNY Economic Policy Review, 4, 7-26
Havrylchyk, O., (2006), Efficiency of the Polish Banking Industry: Foreign versus Domestic Banks, Journal of Banking and Finance, 30, 1975-1996.
https://doi.org/10.1016/j.jbankfin.2005.07.009
Hou, X., K. Chang, Q. Wang, and C. Li. 2013. State ownership, foreign minority shareholders, and the efficiency of Chinese Commercial Banks. Emerging Markets Finance and Trade 49 (s2):70–90.
https://doi.org/10.2753/REE1540-496X4902S204
Ianotta, Giuliano, Giacomo Nocera dan Andrea Sironi, 2007, “Ownership Structure, Risk and Performance in the European Banking Industry. Journal of Banking and Finance. Elsevier. 31(7). pp 2127 . 2149
https://doi.org/10.1016/j.jbankfin.2006.07.013
Iftekhar Hasan & Ru Xie (2013). “ Foreign Bank Entry and Bank Corporate Governance in China”, Emerging Markets Finance and Trade, 49:2, 4-18
https://doi.org/10.2753/REE1540-496X490201
International Monetary Fund. (2018). “Bank nonperforming loans to total gross loans(%). Global Financial Stability Report
International Finance Corporation. “The Indonesia Corporate Governance Manual’. First Edition. January 2014
Kang, J.-K., and J.-M. Kim. 2010.” Do foreign investors exhibit a corporate governance disadvantage? An information asymmetry perspective”. Journal of International Business Studies 41:1415–38.
https://doi.org/10.1057/jibs.2010.18
Kim I, Kim J, Kim W, Byun S.(2010).”Foreign Investor and Corporate Governance in Korea Pacific-Basin Finance Journal.; 18, 390-402
https://doi.org/10.1016/j.pacfin.2010.04.002
Kiruri, R. M. 2013. “The effects of ownership structure on bank profitability in Kenya”. European Journal of Management Sciences and Economics 1 (2):116–27
Liang, Q., Xu. P.,Jiraporn. P.(2013).”Board Characteristics and Chinese Bank Performance.”Journal of Banking and Finance. (37). 2953-2968
https://doi.org/10.1016/j.jbankfin.2013.04.018
Lin, X., and Y. Zhang. 2009. “Bank ownership reform and bank performance in China”. Journal of Banking & Finance 33:20–2
https://doi.org/10.1016/j.jbankfin.2006.11.022
Lensink, Robert, R., Meesters, and Naaborg, Iko.(2008).” Bank Efficiency and Foreign Ownership: Do Good Institutions Matter?”, Journal of Banking & Finance 32(5):834-844
https://doi.org/10.1016/j.jbankfin.2007.06.001
María Eugenia, Delfino.2007. “Control Changes and Firm Performance in Banking”, International Journal of the Economics of Business, 14:2, 261-281
https://doi.org/10.1080/13571510701344061
Meyer, K. E., S. Estrin, S. K. Bhaumik, and M. W. Peng. 2009. Institutions, resources and entry strategies in emerging economies. Strategic Management Journal 30:61–80.
https://doi.org/10.1002/smj.720
Ozili, Peterson Kitakogelu, Uadiale, Olayinka.(2017). “Ownership concentration and bank Profitability.” Future Business Journal 3 (2017) 159
https://doi.org/10.1016/j.fbj.2017.07.001
Pindyck, Robert.S and Daniel L Rubinfeld, 1995, Microeconomic, edition 3, China.Prentice- Hall.
Putri, VR. and Lukviarman, N. 2008. “Pengukuran Kinerja Bank Komersial Dengan Pendekatan Efisiensi, Studi Terhadap Perbankan Go-Public di Indonesia”. Journal JAAI, Volume 12 (1)
Phung, D. N., and T. P. V. Lee. 2013. Foreign ownership, capital structure and firm performance: Empirical evidence from Vietnamese listed firms. The IUP Journal of Corporate Governance 12 (2):40–58
Rose, P. S. and S. C. Hudgins.(2013).""Bank Management and Financial Services"". New York: McGraw-Hill.
Shaher, T.A., Kasawneh, O., Salem, R. (2011), The Major Factors that Affect Banks’ Performance in Middle Eastern Countries. Journal of Money, Investment and Banking, 20, 101-109
Soba, M., Erem, I., and Ceylan, F. (2016). “The impact of corporate governance practices on bank efficiency: A case of Turkey”. Journal of Suleyman Demirel University Institute of Social Science, 25(3):305–3
Steiner G.A.,and Steiner J.F.(1997).”Business, Government and Society: A Managerial Perspective. New York: Mc Graw-Hill
Yong-Cheol Kim, Sok-Gee Chan,& Eric H. Y. Koh (2016),” Effect of Foreign Shareholdings nd Originating Countries on Banking Sector Efficiency, Emerging Market Finance & Trade”, Routledge, Taylor & Francis Group ISSN 1540-498X
Wahyuni, S., and M. A. Prabowo. 2012.” Corporate control and firm performance: Does the type of owners matter?” Interdisciplinary Journal of Research in Business 2 (3):23-33.
Whitley, R., and P. Kristensen. 1996. “The changing European firm: Limits to convergence”. London: Routledge.
Wiwattanakantang, Y. 2001. “Controlling shareholders and corporate value: Evidence from Thailand”. Pacific-Basin Finance Journal 9:323–62.
https://doi.org/10.1016/S0927-538X(01)00022-1
Wooldridge, J. M. (2010),” Econometric analysis of cross section and panel data”, MIT press.
World Bank, “Foreign Entry Affect the Domestic Banking Market?” World Bank Policy Research Working Papers No 1918, June 1998.
Wu, H.-L., C.-H. Chen, and M.-H. Lin. 2007. “The effect of foreign bank entry on the operational performance of commercial banks in the Chinese transitional economy. Post-Communist Economies”. 19 (3):343–57.
https://doi.org/10.1080/14631370701504404
Wu, Ching-Chih; Lin,Bing-Huei; and Yang, Tung-Hsiao.(2016). “How do Agency Problems Affect the Implied Cost of Capital?” .Journal of Reviews on Global Economic.Vol.5. page .210-226
https://doi.org/10.6000/1929-7092.2016.05.18
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Published
2019-12-17
How to Cite
Rivai, A., Saksana, J. C., & Kusnadi, K. (2019). Foreign Shareholdings Impact on Efficiency of the Acquired Local Banks in Indonesia. Journal of Reviews on Global Economics, 8, 1062–1076. https://doi.org/10.6000/1929-7092.2019.08.92
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