Corporate Governance in Indonesian Banking Industry

Abstract

The Indonesian banking sector has recently suffered from bad debt and liquidity problems. The Indonesian banking crisis that has occurred since 1997 has impoverished bank’s performance and reduced shareholder wealth. The deterioration of bank performance with respect to bank as an intermediation agent also affects the wealth of stakeholders, especially depositors. Agency problems cause severe effects on bank performance. This research examines agency theory arguments in the banking industry by analyzing the effect on the firm specific variables, managerial stock ownership, leverage, and dividend yield. Agency costs are proxied by earnings volatility, manager’s portfolio diversification losses, bank size, and standard deviation of bank equity returns. This is among the first research to examine the determination of financial policy variables based on agency theory perspectives in the banking industry. This research examines the largest 133 Indonesian banks during the period of 2000-2004. This study suggests that bank size and a measure of the manager’s portfolio diversification opportunity set affect the bank’s level of managerial stock ownership, leverage, and dividends.

Keywords: Bank, Agency Conflict, Ownership, Leverage, Dividend

JEL Classification: F23, G21