Abstract
Indonesian banking sector has recently been suffering from bad debt and liquidity problems. Crisis since 1997 has impoverished bank’s performance and reduced shareholder wealth. The deterioration of bank’s performance with respect to bank’s purpose to be an intermediation agent also affects the wealth of stakeholders, especially depositors. Agency problem has severe effects on bank’s performance. Openness policy especially in bank ownership structure also has an effect on competition between banks. Globalization forces early openness on banking industry, therefore foreign ownership in banking industry becomes usual in Indonesia. Central bank has an obligation to support citizen with variety of banking services, without sacrificing security. Although Indonesia has several prospective domesticowned banks, however crisis weakened national banking industry. Therefore, type of ownership should have difference effect on agency problems controlling mechanism. This research examines agency theory arguments in banking industry by analyzing the effect on firm specific variables, which are managerial stock ownership, leverage, dividend yield, and type of ownership. Agency costs proxy by earnings volatility, manager’s portfolio diversification losses, bank size, and standard deviation of bank equity returns. Types of ownership are domestic-owned banks, and foreign-owned banks. It is one of the first researches that examine the determination of financial policy variables based on agency theory perspective in banking industry. This research examines the largest 51 banks during the period of 1999-2004 using quarterly financial report. The result showed bank size and a measure of manager’s portfolio diversification opportunity set affect the bank’s level of managerial stock ownership, leverage, and dividends. The result also confirms the difference effect of type of banks ownership to controlling mechanism of agency problems.
Highlights
Several studies have examined corporate leverage and dividend policy to analyze the effect of agency costs on managerial decisions
The results suggest that reputable foreign-owned banks may be able to implement controlling mechanism of agency problems better than do domestic-owned banks
As the managerial losses from holding a less diversified portfolio increase and the diversification opportunity set (Diverse) measure decreases, the use of leverage will be increased so as to try to reduce the higher agency costs associated with equity
Summary
Several studies have examined corporate leverage and dividend policy to analyze the effect of agency costs on managerial decisions. Hannan (1979) and Hannan and Mavinga (1980) regress bank expenses on a set of factors which are proxies for agency effects Their studies examine agency issues in the banking industry by analyzing the leverage and dividend policy of those firms. They raise money from society (creditors) in the form of deposits The creditors in this case are lacking in monitoring the owners (principals) and bankers (agents), thereby increasing the possibility of moral hazard. Another factor that distinguishes the banking industry from the others is the existence of deposit insurance. This research examines the effects volatility of earnings, bank size, standard deviation of returns, and manager’s portfolio diversification as proxy of agency cost, and type of bank’s ownership (foreign and domestic) as proxy for openness in banking sector, on three independent variables which are leverage, dividends, and managerial stock ownership
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