Banks that are publicly owned have different agency problems and challenges than those of the privately owned because of the wide separation of control and ownership. In publicly owned banks ownership is widely dispersed because of which the control of owners on the mangers is relatively weak resulting in the asymmetric of information and divergence of incentives between managers and owners. On the other hand private banks are mainly characterized with centralized ownership because ownership is less dispersed and owners are having larger shares and interest in the performance of banks. Furthermore in centralized ownership owners can control the working of the mangers because of the access to the internal information and influence on the decision making. The difference between the publicly owned and privately owned banks are not only limited to the control and management but they also differs in terms of capital market access and market discipline. In case of publically owned banks risk taking ability is affected by the market discipline because it controls the risk taking behavior of banks thus when considering risk taking incentives of banks market discipline should also be considered. Market discipline is one of the main pillars of Basel II Capital Accord. The main idea behind market discipline is to enhance the bank supervision in order to reduce the risk taking incentives of publicly owned banks and privately owned banks that mainly dependent on the debts as the primary source of funding. Public equity can be raised quickly and at lower costs as compared to the private equity. When publicly owned banks enter the market with high risk strategies, they have greater chance of raising funds as compared to their counterparts with same strategies. According to Shleifer and Vishny the extent to which ownership is concentrated, improves the corporate control by enhancing the control and monitoring of management. In dispersed ownership no individual investor has greater stake involve in firm therefore they are not much concerned with the control and monitoring the performance of firm, whereas in concentrated firms stake of individuals or closely related group of investors are involved, the loss in value of firm will have bad effect on these investors therefore they are more concerned with the control and performance of firms. Realize your dreams with Speedy Payday Loans here - https://speedy-payday-loans.com/dreams-realizations-due-to-speedy-payday-loans.html. Burket, Gromb, and Panunzi challenged the view that reduction in managerial discretion by dispersed outside ownership is always beneficial. Burket et al., suggested that the reduction in managerial discretion by dispersed outside ownership is not always beneficial, it comes with costs such as expropriation threat. They also argued that even in case of tight or concentrated outside ownership, it constitutes threat of expropriation that results in the reduction of the managerial incentives. With the reduction of managerial incentives the non-contractible investments (off-balance sheet) that mangers do for the benefits of shareholders also reduces, thus the threat of expropriation results in the reduction of firm value. Large shareholders with concentrated majority groups are mostly the main drivers of the firms, and have different interest from minority shareholders. Gomes and Novaes concluded that conflicting groups of majority shareholders protects the interest of minority shareholders and also prevent the firms from taking efficient decisions. Regulation of governments regarding the specific industry or sector also play important role in the working of mangers, which was studied by Demsetz and Lehan, they argued that the strong regulation regarding specific industries such as financial sector, play important role in regulating the discipline and decisions of mangers, resulting in the reduced benefits of ownership structure. Elyasiani and Jia supported the findings of Demsetz and Lehan and further concluded that institutional supervision can replace the owners monitoring of firms. The existing literature has also focused the risk taking ability of the publicly and privately owned banks. For instance, Nichols, Wahlen, and Wieland suggested that publicly owned banks generally has more loan losses and loan losses provisions than privately owned banks. If you do not want to take a loan via bank you are welcome on Speedy Payday Loans. The existing literature has suggested that the risk taking ability and agency problems varies in firms with the nature of ownership. Among agency problems first issue was identified by Jensen and Meckling known as conflict of interest, which suggests the diversified shareholders are willing to take higher risks to increase their earnings whereas mangers tries to reduce risk exposures and losses, in order to save their positions and to serve their personal benefits. One of the early empirical studies relating impact of ownership structure on bank risk taking incentives was conducted by Saunders, Strock, and Travlos. They hypothesized that stock holder controlled banks have greater incentives to take risks as compared to the privately owned banks, there results supported the hypothesis and suggested positive relation between stockholder control and risk taking incentives. They also concluded that risk taking incentives and managerial control are negatively associated with each other. Like Saunders et al., other studies also found significant association between ownership and risk taking incentives but without any consistent agreement on the sign of relationship. Some studies found positive relationship, some suggested negative and few proved U-shaped or inverse U-shaped relationship. For instance, Sullivan and Spong concluded that the banks having mangers as their shareholders, the stock ownership of such banks are positively associated with the bank risk, which shows that under certain situations banks manger operates the banks for the benefits of their owners. Furthermore, Westman found that in non-traditional banks management ownership is positively associated with the profitability, whereas in traditional banks board ownership is positively associated with the profitability. Existing literature has analyzed the association between ownership structure and banks performance with no concise empirical evidences on relation, furthermore theoretical explanation of the relation is also not clear. For instance Aghion and Tirole concluded that firm performance can be improved through concentrated ownership because of the increase in supervision and prevention of managerial takeovers, whereas, Shleifer and Vishny in there theoretical study argued that large shareholders can use their power to influence strategies in favor of their own benefits and can exploit the minority share holders. Boubakri and Ghouma found that expropriation by the ultimate owners affects the performance of firms bonds and ratings. Laeven and Levine found that the risk taking ability of the banks increases with powerful owners. Later on Haw, Ho, Hu, and Wu confirmed the findings of Laeven and Levine by suggesting that the concentrated ownership exhibits higher insolvency risk, poor performance and greater earnings volatility. Whereas Shehzad et al., found that when the ownership concentration is 50 percent or more than NPLs decreases, they also suggested that weak shareholder protection rights are beneficial for the ownership concentration for banks. The existing literature has provided evidence relating the performance comparison between publicly and privately owned banks. Agency costs in the government owned firms can results in the weak managerial rewards, under-utilization and misallocation of resources. Agency cost view illustrates that private firm’s mangers do not work at their full potential as compared to private firm’s counterpart and usually use most of the resources for their personal benefits. From political corruption aspects state owned banks works to serve the supporters of government, political influence in banks decreases efficiency and loan quality by allocating the funds on political basis. The existing studies have proved that poorer loan quality and high NPLs are mainly associated with government owned banks. Iannota et al., also concluded that privately owned banks are more profitable than government owned and mutual banks. They also found that among mutual, private and public banks, publicly owned banks has the highest NPLs and bad loan quality whereas mutual banks has lowest NPLs and high quality loans. Furthermore, Micco, Ugo, and Monica have found that privately owned banks has the better performance than all other banks in developing countries. They also find that the state owned banks have higher costs and lower profitability as compared to the private banks, whereas opposite is the case for foreign owned banks. Two important things must be considered while testing Berle and Means theory in the context of banking sector, first the minority shareholders protection, and second deposit holders protection. The existing studies showed that minority shareholder have no control over the firm management unless they are provided with proper legal protection. Similarly La Porta, Lopez, Shleifer, and Vishny found that ownership concentration is negatively associated with shareholder protection. Their findings are consistent with the hypothesis that small dispersed shareholders are not important in those countries where their rights are not protected. Because of these two reasons protection of minority share holders is considered in empirical model of this study. Pathan investigated the importance of board structure of banks on their risk taking ability and used the data of USA banks and found that strong boards represented by most of share holders increases the risk appetite of banks. Whereas, CEO powered banks have little or no risk appetite. Supervisory authorities implement depositor protection rights, act in favor of depositors and protect their interests, whereas deposit insurance safeguards the wealth of the depositors. As a result depositors demand for lower interest rates, resulting in lower risk taking opportunity for banks. Here the differences between the banking firm and non-financial institution must be considered. The main difference is that banks have both account holders and share holders, whereas non-financial institutions only have shareholders. Banks have to look for the benefits of both the depositors and shareholders. But in order to increase the profits shareholders together with banks mangers enter into illegal acts against the depositors by increasing the lending to the risky borrowers at higher rates. This may results in growth of NPLs and capital inadequacy. Further it increases moral hazards problems because neither bank nor shareholders takes the responsibility of their illegal acts. To secure the interest of banks supervisory authorities keep close look on the policies of banks. Park and Peristiani used the banking data to examine the moral hazard problem and investigated that bank shareholders can pursue risky strategies by using the insured deposits or not. Their results showed that strong protection rules and supervision can reduce the moral hazard problem. Therefore, role of supervisory institutions and deposits insurance are incorporated in the empirical model. Four existing studies are closely related to the relationship between ownership structure and NPLs. Caprio et al., investigated the impact of both share holder protection laws and ownership structure on the bank valuation. They used the data of 244 banks of 44 countries. They find that in few countries where protection laws are strong banks have dispersed ownership, whereas in countries where protection laws are weak banks are family or government owned. Their results showed that ownership structure play vital role in governing of banks. Furthermore they find that owner value is boosted by controlling large cash flows of banks, share holder value increases because of the strong protection laws and right on the cash flow decreases the adverse affect of minority shareholders. This study distinguishes from Caprio et al., by using NPLs in place of the bank value. Laeven and Levine conducted the first empirical study on theories relating the banks risk appetite, national bank regulations and ownership structures. Their study was based on investigating the impact of conflict between owners and managers over bank risk appetite. They find that comparative power of shareholders has positive impact on the risk taking ability of banks. They further proved that capital regulation, bank risk, restriction on bank activities and deposit insurance policies depends on the banks ownership structure. There are few differences between Laeven and Levine and current study. First, they used the ownership structure of 10% to 20% whereas this study uses dummy variable of publicly, privately and foreign owned banks as measures of ownership structure. Second, they used z-score as a proxy for risk whereas this study uses NPLs as proxy of bank riskiness. Third, they used data of 44 countries, but this study uses only the commercial banks data of Pakistan. This study is similar to the study of Shehzad et al.,, who investigated the impact of ownership on bank riskiness (measured by NPLs and capital adequacy). They used 500 banks data from 50 countries over the period of 2005-2007. They find that concentration of ownership has negative impact on the NPLs and helps in reducing NPLs, whereas concentration of ownership has positive impact on the capital adequacy ratio. They further argued that at low level of supervisory control and protection rights, ownership structure has negative impact of riskiness. The current study differs from Shehzad et al., in three aspects, first, they have used the banks data from 50 countries but this study uses the data of Pakistani banks. Second, they have used NPLs and capital adequacy as measures of riskiness whereas this study uses only NPLs as riskiness measure. Third, their study used three measures of ownership concentration i.e. 10% or more, 25% or more and 50% or more, whereas this study uses dummy variables of publicly, privately and foreign owned banks as the measure of ownership concentration. Barry et al., used detailed European commercial banks ownership data to analyze the relationship between different ownership structures of privately and publicly owned banks and level of risk and profitability. They divided the ownership structure into five categories. They proved that ownership structure significantly explains the risk differences in different categories especially in private banks. They find that as the equity stake of individual or banking institution increases the assets riskiness and decreases default risk. When non-financial institutions or institutional investors are holding the highest shares then they go for the riskiest strategies. The results showed that change in ownership for the private banks have no affect on bank risk appetite. They also find that the regulation of banking supervision authorities increases the efficiency, lowers the NPLs and improves the quality of publicly held banks. The current study relates to Barry et al., in two aspects, first, Barry et al., have used five categories of ownership structure whereas this study uses three categories (public, private and foreign owned banks) because data is only available relating three categories. Second, like Barry et al., the current study also investigated the association between risk and ownership structure. Based on existing literature current study formulated eight hypotheses relating association between NPLs and ownership structure and other related variables. The hypotheses are given below H1: Public ownership results in the declined banking performance and increased NPLs. H2: Private ownership results in the enhanced banking performance and decreased NPLs. H3: Foreign ownership results in the enhanced banking performance and decreased NPLs. H4: high investor protection (deposit holder protection) results in the decline in NPLs. H5: High supervisory control results in the decline in NPLs. H6: High restrictions on activities results in the decline in NPLs. H7: High bank concentration results in the growth of NPLs. H8: Listed or not listed bank may have positive or negative impact on the NPLs. The research frame work of ownership structure and other literature supported variables is given below Figure 1. Ownership structure and other related variables research framework 3
