Bank Ownership Structure, Market Discipline and Risk: Evidence from a Sample of Privately Owned and Publicly Held European Banks

Abstract

The objective of this paper is to analyze the influence of ownership structure on the risk taking behavior of European commercial banks. We consider five categories of shareholders (managers/directors, institutional investors, non financial companies, individuals and families, and banks). Controlling for various factors, we find that asset risk is lower for banks where a higher proportion of total stocks is held by families and individuals who have less diversified portfolios. We also find that the probability of default of banks is higher when non financial companies or institutional investors hold a higher proportion of total equity. However, these results do not hold for listed banks in which non financial companies hold higher stakes suggesting that the market might be limiting the risk-taking incentives of such shareholders. We further show that market forces might be more effective in influencing risk in banks with a higher involvement of non financial companies than in banks with a higher portion of stock held by institutional investors.

Keywords: Ownership structure, bank risk, European banks, Market Discipline

JEL Classification: G21, G32