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Ownership concentration and market value of European banks

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Abstract

This paper investigates the relationship between ownership concentration and market value of European banks, and the role of the institutional environment in shaping this relationship. Using GMM dynamic estimator on a sample of European banks over a 13-year period (1993–2005) we find on average a negative effect of ownership concentration on bank value, measured by Tobin's Q. However, this effect varies across different institutional settings; while higher ownership concentration results in a lower bank value particularly in the countries belonging to German legal family, the impact of ownership concentration is positive in Scandinavia. We propose that, besides the legal protection of small investors, the differences in the impact of ownership concentration across the countries could be due to the identity of the predominant owners, i.e. financial institutions in Germany and trusts and foundations in Scandinavia. This in turn implies that restrictions of shareholdings in banks could alleviate governance problems in some countries, but lower bank valuation in others.

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Notes

  1. A blockholder is an owner holding at least 5 % of ownership or voting rights in a corporation.

  2. Governments provide banks with deposit insurance schemes, i.e. a guarantee to pay off part of the deposits in case of banks’ insolvency. Such a safety net, however, raises the incentives of bank’s managers to lower their capital base and take on more risk.

  3. Countries belonging to the English legal family are: the UK and Ireland. Countries belonging to the French legal family are: Belgium, France, Greece, Italy, Luxembourg, Netherlands, Portugal and Spain. Countries belonging to the German legal family are: Germany, Austria and Switzerland. Countries belonging to the Scandinavian legal family are: Norway, Sweden, Denmark and Finland.

  4. Being aware of the fact that the existence of specific political developments in different countries has meant that these countries’ legal institutions have also a more direct role in determining international ownership patterns by placing differing restrictions on the holding of shares both by financial and non-financial corporations (Allen and Gale, 2004), we might wonder what the actual power of the legal families is compared to that of nationality in explaining these international differences in ownership structures. A variance–covariance analysis of our data indicates that, while nationality is a strong determinant of the governance characteristics of banks (accounting for up to 47 % of the variation in the percentage of closely held shares), the legal family also stands for a relatively large part of the variation in blockholder ownership, explaining the main portion of the nation effect. These results are available upon request.

  5. We thank a reviewer for pointing this out.

  6. Equity capital ratio captures the rate of capitalization of banks. The more capitalized banks are, the higher the ability to sustain future losses.

  7. Therefore, a limitation to our study is the assumption of product market competition as a time-constant variable, when we have reasons to suspect an increase in competition over time in the period covered in our sample (1992–2005). The European Central Bank (ECB 2006) reports an uninterrupted trend of market consolidation in the European banking industry since 1997, as shown by the declining number of credit institutions. In particular, looking at the degree of concentration in the banking industry, the weighted Herfindahl index (which measures the sum of the square market shares of the individual institutions) rose from 504 in 2001 to 601 in 2005 in the EU countries (ECB 2006). In the same period and for the same countries, the share of total assets of the five largest credit institutions increased from 37.8 to 42.3 % (ECB 2006). Because of this variation, we should ideally include a measure of product market competition in our study. However, the information on the degree of concentration provided by the ECB is only available from 2001 and onwards.

  8. Ordinary least squares and fixed effects panel data estimation also report a negative blockholder effect on bank performance, albeit insignificant.

  9. The inclusion of the legal family dummies, in addition to their particular interaction with the blockholder ownership variable, is not supported in the GMM estimations, since these dummies are constant and thus drop from the estimations.

  10. The sub-sample of banks with low levels of blockholder ownership is constructed for a blockholder ownership below 50 % (low concentration sub-sample) and the sub-sample of banks with high levels of blockholder ownership is constructed for a blockholder ownership equal to or above 50 % (high concentration sub-sample).

  11. To perform such tests we create a dummy equal to 1 for all banks falling in the group of high blockholder ownership concentration levels, zero otherwise; we interact this dummy with all the independent variables in models 1 and 2, as well as models 3 and 4 in Table 4. We then run GMM regressions including all independent variables as well as their interactions in the same regression. We only report the test statistics in the text, when significant. However, the results of these tests are available upon request.

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Authors and Affiliations

  1. Novo Nordisk A/S, Bagsvaerd, Denmark

    Ilduara Busta

  2. Department of International Economics and Management, Copenhagen Business School, Center for Corporate Governance, Frederiksberg, Denmark

    Evis Sinani & Steen Thomsen

Authors
  1. Ilduara Busta
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  2. Evis Sinani
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  3. Steen Thomsen
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Correspondence to Evis Sinani.

Additional information

We would like to thank three anonymous referees, Aleksandra Gregoric as well as participants in presentations at Copenhagen Business School, European Association of Law and Economics (EALE) and Financial Management Association (FMA) for comments on earlier versions of this paper.

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Busta, I., Sinani, E. & Thomsen, S. Ownership concentration and market value of European banks. J Manag Gov 18, 159–183 (2014). https://doi.org/10.1007/s10997-012-9223-8

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