Grigol, Modebadze (2011): Foreign Investment Effects on the Banking Sector in Georgia.
Download (339kB) | Preview
Using data from 2004 – 2008, we investigate the effect of foreign ownership on banks efficiency and financial performance. The data is a balanced panel consisting of 16 banks and 640 observations. In random effect regression, to investigate the influence of foreign ownership type banks’, we use the efficiency measures ROA (return on asset) and ROE (return on equity). Appling stochastic frontier analysis, we estimate banks cost efficiency. The efficiency analysis reveals that banks with foreign strategic ownership or international financial institutions involvement (EBRD or IFC) are more cost efficient than their domestic counterparts. The study also found that foreign strategic ownership positively affects the return on equity but negatively affects the banks’ return on assets. Investigation of how efficiently foreign majority owned banks are using their inputs showed that banks with foreign majority ownership are significantly less cost efficient than those with foreign strategic ownership. We find that foreign majority ownership has ambiguous effects on financial performance — it increases the return on assets but decreases the return on equity. This research highlights the importance for bank performance of a large strategic shareholder who takes a controlling interest in the bank.
|Item Type:||MPRA Paper|
|Original Title:||Foreign Investment Effects on the Banking Sector in Georgia|
|Keywords:||Foreign Ownership, Banking, Cost Efficiency, Stochastic Frontier Analysis|
|Subjects:||L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L25 - Firm Performance: Size, Diversification, and Scope
G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers ; Acquisitions ; Restructuring ; Corporate Governance
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages
|Depositing User:||Grigol Modebadze|
|Date Deposited:||19. Aug 2011 08:17|
|Last Modified:||13. Mar 2015 11:48|
Aigner, D., C.A.K. Lovell, Schmidt, P.,(1977) Formulation and estimation of stochastic frontier production function models, Journal of Econometrics 6, 21-37.
Ali Awdeh., (2005) Domestic banks’ and foreign banks’ profitability: Difference and their determinants, http://www.cass.city.ac.uk/conferences/emg_finance/Papers/Awdeh.pdf
Altunbas Y., Ming-Hua, L., Molyneux, P., Seth R., (2000) Efficiency and risk in Japanese banking, Journal of Banking and Finance 24, 1605-1628.
Battese, G.E., Coelli, T. J., (1995) A model for technical inefficiency effects in a stochastic frontier production function for panel data, Empirical Econometrics 20, 325-332.
Bhattacharya, A., Lovell, C.A.K., Sahay, P., (1997) The impact of liberalization on the productive efficiency of Indian commercial banks, European Journal of Operational Research. 98, 332–345.
Bonin, P. John, Iftekhar Hasan, Paul Wachtel., (2005) Bank performance, efficiency and ownership in transition countries, Journal of Banking and Finance 29, 31-53.
Clarke, George, Robert Cull, and Maria Soledad Martinez Peria., (2001) Does Foreign Bank Penetration Reduce Access to Credit in Developing Countries? Evidence from Asking Borrowers, World Bank Development Research Group Washington, www.econ.worldbank.org
Clarke, George, Robert Cull, Maria Soledad Martinez Peria, and Susana M. Sdncbez., (2001) Foreign bank Entry experience, Implications for Developing Countries, and Agenda for further Research, World Bank Policy Research Working Paper 2698
Clarke, R.G. George, Robert Cull, and Maria Soledad Martinez Peria., (2006) Foreign bank participation and access to credit across firms in developing countries, Journal of Comparative Economics 34, 774-795
Classesns, Stijn, Asli Demirguc-Kunt, and Harry Huizinga., (2001) How does Foreign Entry Affect Domestic Banking Market?, Journal of Banking and Finance 25, 891-911
Coelli T.J. "A Guide to FRONTIER Version 4.1: A Computer Program for Stochastic Frontier Prodaction and Cost Function Estimation", Centre for Efficiency and Productivity Analysis (CEPA) Working Papers, N 7/96
De Haas, Ralph, and Ilko Naaborg., (2005) Does Foreign Bank Entry Reduce Small Firms Access to Credit? Evidence from European Transition Economies, De Nederlandsche Bank Working Paper 50
Deprins D, Simar L, Tulkens H, (1984) Measuring labor inefficiency in post offices. In: Marchand M,Pestieau P, Tulkens H (Eds), The Performance of Public Enterprises: Concepts and Measurements. Amsterdam, North-Holland, 243-267
De Yong, Robert, and Daniel Nolle., (1996) Foreign-owned banks in the United States: Earning market share or buying it?, Journal of Money, Credit and Banking 28.4, 622-636
Focarelli, Dario, and Alberto Franco Pozzolo., (2000) The Determinants of Cross-Border Bank Shareholdings: an Analysis with Bank-Level Data from OECD Countries, BANCA De ITALIA, Temi di discussione, del Servizio Studi 381
Fries S., Taci A., (2002) Banking reforms and development in transition economics, European Bank for Reconstruction and Development (EBRD) working paper No 71
Fries S., Taci A., (2005) Cost efficiency of banks in transition: Evidence from 289 banks in 15 post-communist countries, Journal of Banking & Finance 29, 55–81
Georgian Banking System Development Strategy for 2006-2009, www.nbg.gov.ge.
Giannetti, Mariassunta, and Steven Ongena., (2005) Financial Integration and Entrepreneurial Activity: Evidence from Foreign Bank Entry in Emerging Markets, http://www.oenb.at/en/img/ongena_giannetti_financial_integration_and_entrepreneurial_activity_tcm16-33983.pdf
Hasan I., Marton K., (2003) Development and efficiency of the banking sector in a transitional economy: Hungarian experience, Journal of Banking & Finance 27, 2249–2271
Havrylchyk O., (2006) Efficiency of the Polish banking industry: Foreign versus domestic banks, Journal of Banking & Finance 30, 1975–1996
Isik, I., Hassan, M.K., (2002) Technical, scale and allocative efficiencies of Turkish banking industry, Journal of Banking & Finance 26, 719–766
Jemric, I., Vujcic, B., (2002) Efficiency of banks in Croatia: A DEA approach, Comparative Economic Studies 44, 69–193
Jondrow, J., Lovell, K., Materov, I., Schmidt, P., (1982) On the estimation of the technical inefficiency in the stochastic frontier production function model, Journal of Econometrics 19, 232-238
Kovsanadze I., (2001) Georgian Commercial Banks Functional Problems today, Tbilisi state university
Kraft, Evan. (2002) Foreign Banks in Croatia: Another Look, Croatian National Bank Working Paper, http://www.hnb.hr
Kuenzle, M., (2005) Cost Efficiency in Network Industries: Application of Stochastic Frontier Analysis, Universität Zűrich
Lensink, Robert, Aljar Meesters, Ilko Naaborg., (2008) Bank efficiency and foreign ownership: Do good institutions matter?, Journal of Banking and Finance 32, 834-844
Lensink, Robert, and Niels Hermes., (2004) The short-term effects of foreign bank entry on domestic bank behaviour: Does economic development matter?, Journal of Banking and Finance 28, 553-568
Magri, Silvia, Alessandra Mori, and Rossi Paola., (2005) The entry and the activity level of foreign banks in Italy: An analysis of the determinants, Journal of Banking and Finance 29,1295-1310
Matousek R., Taci A., (2004) Banking efficiency in transition economies: Empirical evidence from the Czech Republic, Economics of Planning 37, 225–244
Miller S.R., Parkhe, A., (2002) Is there a liability of foreignness in global banking? An empirical test of banks X-efficiency, Strategic Management Journal 23, 55–75
Nikiel E.M., Opiela T.P., (2002) Customer type and bank efficiency in Poland. Implications for emerging market banking, Contemporary Economic Policy 20, 255–271
Park BU, Simar L, Zelenyuk V., (2008) local likelihood estimation of the truncated regression and its derivatives: theory and application, Journal of Econometrics 146(1), 185-198
Peek, J., and Erik Rosengreen. (1997) Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States, www.bos.frb.org http://www.bos.frb.org/economic/wp/wp1997/wp97_5.pdf
Peria, Maria Soledad Martinez, and Ashoka Mody., (2004) How Foreign Participation and Market Concentration Impact Bank Spreads: Evidence from Latin America, World Bank Policy Research Working Paper 3210
Resti, A., (1997) Evaluating the Cost-Efficiency of the Italian Banking System: What Can Be Learned from the Joint Application of Parametric and Non-Parametric Techniques, Journal of Banking and Finance 21, 221–250
Song, Inwon., (2004) Foreign Bank Supervision and Challenges to Emerging Market Supervisors, IMF Working Paper 04/82
Sturm J.E., Williams B., (2004) Foreign bank entry, deregulation and bank efficiency: Lessons from the Australian experience, Journal of Banking & Finance 28,1775–1799
Wang, H.-J., Schmidt, P., (2002) One-step and two-step estimation of the effects of exogenous variables on technical efficiency, Journal of Productivity Analysis 18,129-144
Weill, Laurent., (2003) Banking efficiency in transition economies, the role of foreign ownership, The Economics of Transition 11.3, 569-592