Abstract
This study investigates state ownership on risk-taking behaviour in Malaysia’s banking industry. Using the panel of Malaysian commercial banks, this paper examines whether banks’ risk-taking is affected by Malaysian government ownership through the five largest investment arms of Malaysia (GLICs). The findings show that state-owned banks exhibit higher risk-taking behaviour compared to the private-owned banks in terms of loans. There is evidence that a higher degree of state ownership has a more significant impact on banks’ risk-taking behaviour. We also investigate the relationship with corporate governance mechanisms. The findings suggest that the composition of board of directors somehow plays a significant role in the governance of banks.
Highlights
The banking sector plays a significant role in Southeast Asia's economic development for the past 40 years
Since GovernmentLinked Investment Companies (GLICs) hold majority ownership in local commercial banks where the Malaysian government has a direct controlling stake, this study examines whether the state ownership and state-owned banks (SOBs) are associated with higher risktaking
Others contend that foreign directors are likely to be less familiar with national accounting standard and management methods, making it more difficult for foreign directors to appraise managerial performance or challenge managerial decisions. Based on these vague statements, we examine the effect of foreign director in the Malaysian banking industry with the third hypothesis developed as follows: H3: Foreign director significantly affects the impact of ownership by Malaysian government on banks’ risk-taking behaviour
Summary
The banking sector plays a significant role in Southeast Asia's economic development for the past 40 years. The act of government intervention to rescue financial institutions has direct and indirect economic costs that have long-lasting effects (Global Financial Development Report, 2019/2020). Prior studies claimed that the presence of moral hazard behaviour induced by government explicit and implicit protection leads to excessive risk-taking behaviour since it does not have to bear the costs (Jensen & Meckling, 1976; Global Financial Development Report, 2019/2020; Zhu & Yang, 2016). Severe consequences on excessive risk-taking can be seen in the incident of Lehman Brothers bankruptcy during the Subprime crisis. They had taken excessive risks in creating loans, could not pay the excessive debts and faced unprecedented losses
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