The relationship between corporate governance and foreign ownership of the banks in developing countries

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ContaduríayAdministración62(2017)1627–1642

www.contaduriayadministracionunam.mx/ www.cya.unam.mx/index.php/cya

The

relationship

between

corporate

governance

and

foreign

ownership

of

the

banks

in

developing

countries

La

relación

entre

gobierno

corporativo

y

propiedad

extranjera

de

los

bancos

en

los

países

en

desarrollo

K. Batu

Tunay

a,∗

,

Serhat

Yüksel

b

a_Marmara_University,_Turkey b_˙Istanbul_Medipol_University,_Turkey

Received15December2016;accepted29May2017

Availableonline2November2017

Abstract

Theaimofthispaperistodeterminetheeffectofcorporategovernanceonforeignownershipofthe banks.Withinthiscontext,annualdataof65developingcountriesfortheperiodsbetween2004and2013 wasanalyzed. Inaddition tothis situation,7explanatory variableswere usedinthis studyin order to achievethisobjective.Asaresultoftheanalysis,itwasidentifiedthatthereisastrongrelationshipbetween operationsofforeignbanksandgovernancelevelsofthecountries.Inthisregard,itwasdeterminedthat the factorsofcorruption,politicalstability,ruleoflawandflexibilityinlegalregulationsaffectforeign bankoperations.Moreover,itwasalsoanalyzedthatforeignbankoperationsarestrongerinthecountries thathavelowpoverty,highpoliticalstabilityandefficientlegalinfrastructure.Ontheotherhand,itwas definedthatstrictlegalregulationaffectsforeignbankoperationsnegativelywhichshowsthatforeignbanks prefertoenterintothecountriesthathaveflexiblelegalregulations.Thisstudygivesessentialinformation todevelopingcountriesaboutthefactorsthataffectthedecisionsofforeignbanksinordertoenterintoa developingcountry.Therefore,byconsideringtheresultsofthisstudy,theauthoritiesofthesecountriescan haveachancetotakenecessaryactionssoastoattractforeignbanks.

JELclassiﬁcation: G21;G28;G34;G38

Keywords: Banking;Corporategovernance;Foreignbanks

∗_{Corresponding}_author.

E-mailaddress:batu.tunay@marmara.edu.tr(K.B.Tunay).

PeerReviewundertheresponsibilityofUniversidadNacionalAutónomadeMéxico.

https://doi.org/10.1016/j.cya.2017.05.007

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Resumen

Elobjetivodeestetrabajoesdeterminarelefectodelgobiernocorporativosobrelapropiedadextranjera delosbancos.Enestecontexto,seanalizaronlosdatosanualesde65paísesendesarrollodelosperíodos comprendidosentre 2004y2013.Ademásdeestasituación, seutilizaron7variablesexplicativas para alcanzaresteobjetivo.Comoresultadodelanálisis,seidentificóqueexisteunarelaciónfuerteentrelas operacionesdelosbancosextranjerosylosnivelesdegobiernodelospaíses.Aesterespecto,sedeterminó quelosfactoresdecorrupción,estabilidadpolítica,estadodederechoyflexibilidadenlasregulaciones legalesafectanalasoperacionesdelosbancosextranjeros.Además,seanalizóquelasoperacionesdebancos extranjerossonmásfuertesenlospaísesquetienenbajapobreza,altaestabilidadpolíticayunaeficiente infraestructurajurídica.Porotraparte,sedefinióqueunaestrictaregulaciónlegalafectanegativamentea lasoperacionesdelosbancosextranjeros,loquemuestraquelosbancosextranjerosprefierenentrarenlos paísesquetienenregulacioneslegalesflexibles.Esteestudioproporcionainformaciónesencialalospaíses endesarrollosobrelosfactoresqueafectanlasdecisionesdelosbancosextranjerosantesdeentrarenun paísendesarrollo.Porconsiguiente,alconsiderarlosresultadosdeesteestudio,lasautoridadesdeestos paísespuedentenerlaoportunidaddeadoptarlasmedidasnecesariasparaqueatraiganbancosextranjeros. ©2017UniversidadNacionalAutónomadeMéxico,FacultaddeContaduríayAdministración.Esteesun artículoOpenAccessbajolalicenciaCCBY-NC-ND(http://creativecommons.org/licenses/by-nc-nd/4.0/).

CódigosJEL: G21;G28;G34;G38

Palabrasclave: Banca;Gobiernocorporativo;Bancosextranjeros

Introduction

Corporategovernancemeanstheprocessesandrelationsthatarecontrolledbythecompanies

(Shailer,2004).Inadditiontothisdefinition,inbankingsector,corporategovernancerefersto

thepurposes,regulationsandstrategieswhicharedirectedbythetopmanagementofthebank.

Themainpurposeofcorporategovernanceistosatisfythedemandsoftheshareholders.Owing

tothisissue,companieswillbemoretransparentandpeoplewillhavemoreconfidencetothem.

Moreover,thissituationalsoleadstoincreaseintheperformanceofthecompanies(Barakat&

Hussainey,2013).

Inadditiontothecompanies,corporategovernanceisalsosignificantforthecountries.With

respecttohighercorporategovernance,politicalinterventionisexpectedtobeattheminimum

levelinthecountry.Therefore,transparencycanbeincreaseditthiscountry(Ho,Lin,&Tsai,

2015).Otherwise,thepoliticalandeconomicalstabilitycannotbeobtained.Duetothisproblem,

foreigninvestorsbecomereluctanttoenterthiscountry.

Furthermore,itwasthoughtthatthereisarelationshipbetweencorporategovernancelevels

andforeignownershipofthebanks.Accordingtotheempiricalstudies,thisrelationshiphastwo

ways.Firstly,itwasdefinedthatforeignbanksprefertoenterintothecountriesthathavehigh

corporategovernancelevels.Similartothissituation,itwasalsodeterminedthatforeignbanks

increasethecorporategovernancelevelsofthecountriesinwhichtheyoperate.

When taking into the considerationof thesefactors, in thispaper, we tried tounderstand

therelationshipbetweencorporategovernanceandforeignownershipofthebanks.Inorderto

achievethisobjective,wemadeapaneldataanalysisto65developingcountries.Bymakingthis

analysis,itwillbepossibletodefinetheeffectofcorporategovernanceonforeignownershipof

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similarstudies.Also,thethirdpartincludesresearchandapplicationtounderstandtherelationship

betweencorporategovernanceandforeignownershipofthebanks.Finally,theanalyzeresults

weregivenatconclusion.

Literaturereview

Thereisanincreaseinthenumberofthestudiesrelatedtothecorporate governanceinthe

literatureinrecentyears.Oneofthemainreasonsbehindthissituationistheglobaleconomic

crisiswhichwasoccurredinUSAin2008andspreadtomanydevelopedanddevelopingcountries.

SomeofthesestudiesaredepictedinTable1.

Table1showsthatalotofstudiestriedtoevaluatetherelationshipbetweencorporate

gover-nanceandCEOcompensation.Forinstance,Acrey,McCumber,andNguyen(2011)analyzedthis

relationshipandconcludedthatthiscompensationincreasestherisksforthebanks.Özelgeand

Saunders(2012),LiandSong(2013),Oh,Park,andGhauri(2013),Angineretal.(2016)reached

thesimilarresultsintheirstudies.Ontheotherhand,FahlenbrachandStulz(2011)concluded

thatthereisnotsuchanegativerelationshipbetweenthem.

Drew,Kelley,andKendrick(2006)andAebi,Sabato,andSchmid(2012)reachedaconclusion

thateffectiveriskmanagementandcorporategovernanceareassociatedwithhigherperformance

forthebanks.Nonetheless,Iqbal,Strobl,andVahamaa(2015)statedthatthereisapositive

rela-tionshipbetweencorporategovernanceandsystematicrisk.Furthermore,QianandYeung(2015)

analyzedtherelationshipbetweenbankfinancingandcorporategovernancewhereasBarakatand

Hussainey(2013)andMasciandaro,Pansini,andQuintyn(2013)emphasizedtheimportanceof

bankregulationandsupervision.

In spiteofthesestudiesinwhichtheroleof thegovernancefor thebankswasanalyzedin

differentsituation,thereareafewstudiesthatemphasizedthegovernanceofthecountriesthat

bankslocated.Cull,Li,Sun,andXu(2015)identifiedthatthefirms,whichhaveacloseconnection

withChinesegovernment,aresubjecttolesslimitations.Itwasalsodeterminedthatthissituation

directlyaffectsthefinancingconditionsofthesefirms.Themainreasonbehindthissituationis

thatloanallocationprocesswillbedegeneratedduetothefactthatsomefirmscanobtainfinance

fromthestatebankseasily.Itcanalsobesaidthatthisissuewilldecreasetheportfolioquality

ofChinesebanks.Similartothisstudy,Lin,Ho,Shen,andWang(2016)reachedtheconclusion

thatduringtheelectionperiodinTaiwan,thereisasignificantincreaseinthestockvaluesofthe

firmsthathaveacloserelationshipwiththegovernment.

In addition tothese studies, Shen, Lin, andWang (2015) defined that there is an inverse

relationship between corporate governance andpolitical relationship withthe government in

Taiwanbyusingpaneldataanalysismethod.Chiatan(2012)alsoreachedthesimilarresultsfor

Romaniabyusingthesamemethod.Additionally,Jackowicz,Kowalewski,andKozlowski(2013)

examinedtheeffectsofpoliticalfactorsontheperformanceofcommercialbanksin11European

countries.They demonstratedthat thereisadecline inthe performanceof state banksowing

tothedecreasingtheinterestrateirrationallyduringtheelectionperiod.Inparallelwiththese

studies,Barry,Lepetit,andStrobel(2015)andChen,Jeon,Wang,andWu(2015)alsodefined

thatcorruptioninstatebanksishigherthantheothertypesofthebanks.

Intheliterature,therearealsosomestudiesthatfocusedontherelationshipbetweencorporate

governance andforeign ownershipof the banks. The common result of thesestudies is that

foreignownershipofthebanksincreasescorporategovernance.ChenandLiao(2011)analyzed

the profitabilityof foreignanddomesticbanksin70different countries.They concluded that

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Table1

Studiesrelatedtocorporategovernance.

Author Method Determinants Results

Drewetal. (2006)

Descriptive Statistics

Culture,leadership,alignment,

systems,structure

Theyconcludedthateffectiverisk

managementisoneofthemain

sourcesofcompetitiveadvantages

forthefirms.

Acreyetal. (2011)

Regression CEOcompensation,ageofthe

executive,numberofyearsas

CEO,naturallogoftotalfirm

assets

ItwasdefinedthatCEO

compensationincreasesbank

defaultrisk

ChenandLiao (2011)

Regression Netinterestmargin,ROA,ROE,

capital,totalassets,operational

cost,liquidity,non-interest

revenues,off-balancesheetitems,

marketshare

Itwasidentifiedthatwhenforeign

banksoperateinahostcountry

withstricterregulatorycompliance,

themarginofthesebanksincreases.

Fahlenbrach

andStulz

(2011)

Regression Cashbonus/salary,ROA,ROE,

equityrisk,logofmarketvalue,

capitaladequacyratio

Theyconcludedthatbanks,which

gavelargeamountofcashbonuses

totheirCEOs,didnotperform

worseduringthecrisisperiod.

Aebietal. (2012)

Paneldata

analysis

ROE,ROA,totalassets,board

size,boardindependence,

loans/assets,capitaladequacy

ratio

Itwasdeterminedthatbanks,which

haveefficientcorporategovernance

andriskmanagementsystem,have

higherperformanceincrisisperiod.

Özelgeand Saunders (2012)

Probit Stockperformance,returnon

assets,totalloans,numberof

turnovers

Bankshaveasignificantroleon

CEOturnoversofthefirmsthat

usedhighamountofloans.

Chitan(2012) Regression ROA,ROE,totalloanstoprivate

sector,capitalregulations,total

deposits,liquidityratio

Itwasidentifiedthathigher

corporategovernanceleadsto

increasetheperformanceofthe

banks. Chaigneau

(2013)

Descriptive Statistics

CEO’spay,CEO’seffort,costof

effort,bankassets,bankvalue,

Itwasdeterminedthatcurrent

corporategovernancearrangements

inthebankingsectorarenot

efficient.

LiandSong (2013)

Paneldata

analysis

Totalassets,capital-assetratio,

loan-assetratio,ownership

concentration,loanlossprovision

ratio,liquidityratio,costto

incomeratio

Itwasdefinedthatlegalsystem

withbetterinvestorrights

protectionandbettercontracts

enforcementincreasesboard

independence.

Jackowicz etal.(2013)

Regression GDP,inflation,M2,net

commissionincome,totalassets,

totalloans,equity

Itwasdeterminedthatstate-owned

banksinEuropehavesmallernet

interestincomeratiosduringthe

yearsofparliamentaryelections.

Masciandaro etal.(2013)

Regression Thedegreeofcentralbank

involvement,GDPgrowth,total

assets,thelogofpopulation

Itwasidentifiedthatsupervisory

governanceisnegativelycorrelated

witheconomicresilience.

Barakatand Hussainey (2013)

Paneldata

analysis

GDPpercapita,inflation,total

assets,politicalstability,cash

deposits,governmentownership

Theyreachedaconclusionthat

bankshavingahigherproportionof

outsideboarddirectorsprovide

operationalriskdisclosureof

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Table1(Continued)

Ohetal. (2013)

Survey Anti-crimepolicy/measure,brand

management,corporate

governance,customer

relationshipmanagement,

researchanddevelopment,

stakeholderengagement

Itwasconcludedthatcorporate

socialresponsibilityisanimportant

factorinordertoincreasethe

performance.

Iqbaletal. (2015)

Regression Non-interestincome,depositsto

assets,loangrowth,loansto

assets,ROA,capitalratio,total

assets

Theyconcludedthatfinancial

institutionswithstrongercorporate

governanceareassociatedwith

higherlevelsofsystemicrisk.

Qianand Yeung (2015)

Paneldata

analysis

ROA,ROE,EBITDA,other

receivables,totalassets,sales

growth

Itwasconcludedthatinefficient

bankfinancingleadstoweak

corporategovernance.

Culletal. (2015)

Tobit GDPpercapita,theageofthe

firm,sales,totalloans,CEOwage

Theyconcludedthatinvestmentin

firmswithstronggovernment

connectionsislesssensitiveto

internalcashflowsinChina.

Zagorchevand Gao(2015)

Multivariate PANEL models

Corporategovernancevector,

Earningsbeforetax,loanloss

provision,totalassets,liquid

assets,dividends,totaldeposits

Itwasdeterminedthatbetter

corporategovernanceisassociated

withlesstotalnon-performing

assets.

Barryetal. (2015)

Probit Lendingcorruption,bank

ownership,firmcontrol,country

control,numberofcompetitors,

sales,GDPgrowth,inflation

Itwasidentifiedthatwhen

state-ownedbanksorfamily-owned

banksprovideahigherproportion

ofcredittotheeconomy,

corruptionishigher.

Luo(2015) GMM ROA,sizeofthebank,leverage

ratio,annualstockreturn,bank

ownership,CEOshare

Theresultsshowthatthereisno

significantrelationshipbetween

bankperformanceandexecutive

compensationinChinesebanking

sector

Chenetal. (2015)

Regression ROA,logarithmofassets,The

ratioofliquidassetstototal

assets,Theratioofoverheadcost

tothesumofnetinterestrevenue

andnon-interestincome

Itwasconcludedthathigherlevels

ofcorruptionincreasethe

risk-takingbehaviorofbanks.

Hoetal. (2015)

Logit Totalassets,totalequity,total

loans,totaldeposits,ROA,total

debtstototalequities,GDP,

budgetsurplus,inflation,

exchangerate

Itwasdeterminedthatcountry

governancereducesprivatization

effectsindevelopingcountries.

Minand Bowman (2015)

Paneldata

analysis

Dividend,currentratio,liquidity,

foreignownership,shortterm

financialdistress

Itwasdeterminedthatthereisa

positiverelationshipbetween

foreignownershipandcorporate

governance.

Shenetal. (2015)

Paneldata

analysis

Totalassets,Profitability,

LeverageRatio,Tangibility

Theyconcludedthatfirmswith

highercorporategovernancefocus

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Table1(Continued)

Anginer, Demirguc-Kunt, Huizinga, andMa (2016)

Regression Capital,marketvalue,board

independence,boardsize,CEO

totalcompensation,CEOshares,

ROA,totalassets

Itwasdefinedthatthereisa

negativerelationshipbetweengood

corporategovernanceandbank

capitalization

Lassouedetal. (2016)

Regression ROA,loanlossprovision,capital

adequacyratio,totalassets,fixed

assets,loantodepositratio

Theyconcludedthatstatebanks

takehigherriskbycomparingwith

foreignbanks.

Linetal. (2016)

Regression Cumulatedabnormalreturns,

ROA,theinvestmenttototal

assetsratio,thelogarithmofthe

lastyear-endmarketvalueof

outstandingsharesofeachfirm,

cashandcashequivalence

Itwasidentifiedthatbothpolitical

connectionandgovernmentpolicy

affectstockreturnsinTaiwan.

betterperformancethanotherbanks.Luo(2015)alsoemphasizedthatmanagersinstatebanks

arenotindependenttogivedecisionswherethereisnotsuchaprobleminforeignbanks.

MinandBowman(2015)alsoanalyzedthecorporategovernanceinSouthKoreaafterthecrisis

occurredin1997.Theyreachedaconclusionthatforeignbanksgiveimportancetotheindependent

managersatthebank.Similarly,Lassoued,Sassi,andAttia(2016)identifiedthatforeignbanks

takeslowerrisksalthoughstatebankshavethetendencytotakehigherrisks.Moreover,Hoetal.

(2015)examinedthe privatizationprocessof113 state banksin39differentcountriesfor the

periodsbetween1996and2007.Theyalsotriedtoanalyzetherelationshipbetweenthisprocess

andcorporategovernance.Asaresultofthisstudy,itwasdefinedthatafterprivatization,there

isanincreaseintheperformanceofthebanksespeciallyindevelopingcountries.Thissituation

showsthatowingtotheprivatization,politicalinterventiontothebankscanbeminimized.

AsitcanbeseenfromTable1,therearelotsofstudiesintheliteraturewhichanalyzedthe

corporate governance.Thesestudiesfocused onthe effectsof corporate governance onmany

differentaspects,suchastheperformanceofthecompaniesandeconomicgrowthofthecountry.

However,thereareonlyafewstudieswhichemphasizedtheimportanceofcorporategovernance

levelsofthecountriesforthedecisionsoftheinvestors.Inadditiontothissituation,thesefew

studiesfocusedontheconditionsinonlyoneortwocountries.Owingtothisissue,itcanbesaid

thatastudy,whichexaminesthesituation inalargenumberofcountries,willcontribute very

muchtotheliterature.

Empiricalanalysis Analysismethod

Empiricalstudies, whichevaluate governance,generallyfocuson theperformanceandthe

stabilityinbankingsector.Itwasidentifiedthatthetypeoftheownershiphasasignificanteffect

onbankperformance.Themainreasonbehindthisaspectisthatbankshareholders,whoholdthe

ownershipcontrol,havethepowertomaintaintheirowncorporategovernancemindset.Within

thisscope,itisobservedthatforeignbankswanttoevaluateprofitableinvestmentopportunities

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banksaremoresuccessfulinlocalmarketswithhighculturalproximity(Clarke,Cull,Martinez

Peria,&Sánchez,2001).Foreignbanksaremainlyfocusedoncorporatebankingactivitiesinthe

countrieswheretheyoperate.Nevertheless,Berger,Klapper,andUdell(2000)foundthatwhen

thereis astrong culturaltiebetweentheoriginal countryofthe bankwiththecountrywhere

this bankoperates,it will finance small businesses muchmore thanthe others. Additionally,

similarculturalfeaturesarealsoinfluentialintheforeignmarketentrystrategiesthatdependon

purchasinglocalbanksbecauseculturalintimacyencouragesforeignbankstobuylocalbanks

(Clarkeetal.,2001).

ArunandTurner(2004)arguedthatincreasinglevelsofcompetitioninthedevelopingworld

asforeignbanksenterthemarketwillimprovetheinstitutionalgovernanceofthebankingsystem.

TheseideasarebasedontheviewsofDemirguc-KuntandDetragiache(1998),Levine(1999),

Claessens, Demirguc-Kunt, and Huizinga (1998), Claessens, Demirguc-Kunt, and Huizanga

(2000)andPeekandRosengren(2000).Thesestudiesshowthatforeignbankingentriesin

emerg-ingeconomiesincreasecompetitioninthebankingsectorandthisissueencouragesthebanksto

implementnewmethodswhichimprovethecorporategovernance.Furthermore,thepresenceof

foreignbanksinthesystemcausesthelocalbankstobemorecautiousabouttakingrisksandthis

decreasesthepossibilityof fragilityandcrisis(Arun&Turner,2004;Caprio&Levine,2002;

Levine,2004).

Lensink, Meesters, and Naaborg (2008) showed that the effectiveness of foreign banking

activitiesincreasedwhenthegovernanceleveldifferencebetweenhostcountryandthecountry

wherethecenteroftheforeignbankislocatedissmall.Thisfindingsuggeststhatforeignbankswill

prefertothecountrieswhichhavehighlevelofcorporategovernance.However,asMiklaszewska

andMikolajczyk(2011)havepointedoutthatforeignbanksaimnotonlyforefficiencybutalso

forprofitabilityandsignificantprofitopportunitiestotheemergingeconomies.Themainreason

forthisaspectisthattheycanhaveachancetoincreasemarketsharequicklyinthesecountries.

MiklaszewskaandMikolajczyk(2011)haveexaminedtheinfluenceofforeignbank

gover-nancelevelontheperformanceinsomeemergingEuropeancountries.Inthemodelstheyanalyze,

thelevelofgovernanceinthehomecountryisconsideredasoneofthevariablesthatexplainthe

performance.Findingshaveshownthathighearningsopportunitiesareamajorfactorinforeign

bank entry.Manyforeignbanksarefollowingriskystrategies.However,itwasidentified that

someforeignbanksgivemoreimportancetotheefficiencymorethanprofitability.Forinstance,

German,Austrian,BelgianandDutchbankspaylessattentiontoefficiency,whiletheUS,Italian

andFrenchbanksattachgreatimportancetothisaspect.Ontheotherhand,themostimportant

findingisthatgovernancehaspositivelyinfluencedoverallbankperformance.Thisfinding

indi-catesthatforeignbankshavegivenimportancetothegovernancemodelofthecountryinwhich

theyoperate.

Whileconsideringtheseissues,itcanbesaidthatgovernancehassignificanteffectson

for-eignbankingactivitiesindevelopingcountries.Becausecorporategovernanceaffectsefficiency,

effectivenessandprofitabilitypositivelyaccordingtosomestudies,foreignbanksconsiderthis

situationforthecountrieswheretheywilloperate.Thisstudyaimstoexaminethevalidityofthe

acceptancethatforeignbanksareaffectedbycorporategovernancelevelsindevelopingcountries.

Withinthisscope,itwasassumedthatgovernancelevelofthedevelopingcountriesissignificant

fortheentrydecisionandoperatingvolumesoftheforeignbanksinthesecountries.Owingto

thissituation,followingmodelwascreatedwiththepre-acceptancethatthenumberofforeign

banksishighandtotalassetsofthesebanksishigherthantheothersinthecountrieswhichhave

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FBit=a+ p

j=1

λjFBit−j+BCGit+εit (1)

InEq.(1),“FB”representsthevectorsofdependentvariables.Itconsistsoftwoalternative

variableswhicharetheratioofforeignbankstototalbanks(FB/TB)incountry“i”attime“t”

andtheratiooftotalassetsofforeignbankstothetotalassetsoftotalbanks(TAf/TA).Moreover,

“CGit representsthevectorsofthevariablesthatshowcorporategovernancelevelsincountry

“i”attime“t”and“B”referstothevectorsoftheparametersforthesevariables:

CGit= {CoCit,GEit,PSAVit,RQit,RoLit,VAit} (2)

In Eq. (2), “CoCit shows control of corruption whereas “GEit

refers to the government

effectiveness.Furthermore,“PSAVit”meanspoliticalstabilityandabsenceofviolenceand“RQit

explainsregularityquality.Inadditiontothem,“RoLit”demonstratestheruleoflawand“VAit”

referstothevoiceandaccountability.Increaseinthesevariablesmeansthatgovernancelevelswill

goupinthiscountryanditplaysanimportantroleinthedevelopmentofforeignbanksactivity

accordingtoourfundamentalassumption.Therefore,itwasestimatedthatthesevariablesaffect

thedependentvariablespositively.Theparametervectorsforgovernancevariablescanbedefined

asB={β1,...,β6}.

Inthisstudy,followingtwoparametricmodelswillbeanalyzedwithrespecttothealternative

independentvariables: (FB/TB)_it =α+ p j=1 λj(FB/TB)_it−j+β1CoCit+β2GEit +β3PSAVit+β4RQit+β5RoLit+β6VAit+εit (3) (TAf/TA)_it =α+ p j=1

λj(TAf/TA)_it−j+β1CoCit+β2GEit

+β3PSAVit+β4RQit+β5RoLit+β6VAit+εit

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Because the models,whichwill be analyzed, havedynamic patterns,it was preferred touse

dynamic panel datamethod inthis study. However, it is very important touse whichof the

alternativedynamicpaneldatamethods.Althoughthesekindsofmodelsarebasedonthestudy

ofAndersonandHsiao(1981),thepresentaspectwasdevelopedwiththestudiesofHoltz-Eakin,

Newey, andRosen (1988)andArellano andBond (1991).Theestimationapproach,basedon

twostagesgeneralizedmethodofmoment(GMM)developedbyArellanoandBond(1991),is

frequentlyusedinsimilaranalysis.Additionally,itwasalsoseenthatsystemdynamicpaneldata

approaches,whichweredevelopedbyArellanoandBover(1995)andBlundellandBond(1998),

arealsousedinrecentstudiesrelatedtothesubjectsofbankingandinsurance.Systemdynamic

modelsarealsobasedontwostagesGMM,buttheyhavesuperiorpredictionpropertiesthanthe

firstversiondynamicmodels.

Itwasthoughtthatsystemdynamicmodelsareidealfordatasetwhichincludesmanysections,

buthasshorttimedimensions.Arellano–Bond(1991)methodgivesinclinedresultsforthistype

data set. However, system dynamic models give correct results by eliminating thisproblem.

Therefore,it should beproved that thereis notsecond-order autocorrelation andinstruments

validityisprovidedinordertobesurethattheresultsofthismodelareconsistent.Thus,after

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Table2

DataDefinitionandSource.

Variable Definition

FB/TB Foreignbanksamongtotalbanks(%)a

TAF/TA Foreignbankassetsamongtotalbankassets(%)a

CoC Controlofcorruptionb

GE Governmenteffectivenessb

PSAV Politicalstabilityandabsenceofviolence/terrorismb

RQ Regulatoryqualityb

RoL Ruleoflawb

VA Voiceandaccountabilityb

a_Wold_Bank,_Global_Financial_Development,₁₄_Sep._2015.

b_World_Bank,_Worlwide_Governance_Indicators,₂₅_Sep._2015.

shouldbeperformedinordertodeterminethevalidityofinstrumentalvariables(Roodman,2006,

2008).Diagnostictestsshouldbeanalyzedbyusingthesemethods.Estimationprocessindynamic

modelsdependsononeortwostagesGMMestimators.Hence,indynamicmodels,thereisalso

an instrumentalvariabledatasetinadditiontothevariablesinthe model.Theseinstrumental

variablescanbeoccurredformthelagsofdependentvariables,lagsofthedifferencesofthese

variables,explanatoryvariablesanddummyvariables.

Dataset

ThedatasetusedinthestudywasprovidedfromtheinternetsiteofWorldBank.According

totheWorldBank’sclassificationofthecountriesregardingincomelevels,thereare104middle

incomecountries.Annualdataof65ofthesecountrieswasusedfortheperiodsbetween2004

and2013.Thenumberoftotalobservationforeachmodelis4550.BecausethedataofAmerican

Samoa cannot be provided,we hadto eliminate thiscountry from the analysis. The data of

thevariables(foreignbanks/totalbanksandtheassetsofforeignbanks/totalbanks’assets)was

providedfromthedatabaseofWorldBankGlobalFinancialDevelopmentin14.09.2015.Onthe

otherhand,thevariablesthatmeasurethegovernancelevelsofthecountrieswerobtainedfrom

BankWorldwideGovernanceIndicatorsreportedin25.09.2015.Thedefinitionsandthesources

ofthesevariablesweredetailedinTable2.

Thevariablesof“foreignbanksamongtotalbanks”and“foreignbankassetsamongtotalbank

assets”areusedinthisstudytorepresentthesituationofforeignownershipofthebanks.Inaddition

tothem,6differentvariablesarealsotakenintotheconsiderationtoseetheeffectofcorporate

governancethatare“controlofcorruption”,“governmenteffectiveness”,“politicalstabilityand

absenceofviolence/terrorism”,“regulatoryquality”,“ruleoflaw”and“voiceandaccountability”.

Asitcanbeunderstoodthatallthesevariablesgiveinformationaboutthegovernancesituation

inacountry.

Results

Firstofall,thestructureofthevariableswasevaluated.Withinthiscontext,descriptive

statis-tics,correlationcoefficientsandstationarytestingwereanalyzed.Thedescriptivestatisticsofthe

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Table3

Descriptivestatistics.

FB/TB TAf_/TA _CoC _GE _PSAV _RQ _RoL _VA

Mean 43.4200 34.5677 −0.1022 −0.1629 −0.1531 −0.1623 −0.1596 −0.0744 Median 42.5000 25.0000 −0.4550 −0.4500 −0.1900 −0.3200 −0.4900 −0.0300 Maximum 91 100 2.46 2.22 1.94 1.99 1.99 1.76 Minimum 0 0 −1.73 −1.87 −2.81 −2.34 −1.79 −2.22 Std.Dev. 24.1782 31.4887 1.0417 0.9749 1.0147 1.0102 1.0031 0.9527 Skewness 0.0167 0.5259 0.8311 0.6761 −0.1693 0.3774 0.6255 0.0107 Kurtosis 1.9916 1.8674 2.6184 2.5846 2.1556 2.4069 2.2521 2.2449 Jarque–Bera 27.5727 64.7102 78.7717 54.1959 22.4177 24.9556 57.5349 15.4551 [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] Table4 Correlationmatrix.

FB/TB TAf_/TA _CoC _GE _PSAV _RQ _RoL _VA

FB/TB 1.0000 TAf_/TA _0.7346 _1.0000 CoC 0.0873 0.1391 1.0000 GE 0.1244 0.1496 0.9474 1.0000 PSAV 0.0591 0.1581 0.7631 0.7196 1.0000 RQ 0.0971 0.1127 0.8784 0.9234 0.6294 1.0000 RoL 0.1048 0.1526 0.9513 0.9364 0.8046 0.8816 1.0000 VA 0.0702 0.1499 0.8025 0.7973 0.6919 0.8013 0.8439 1.0000

DespitethefactthatPSAVitisnegativelyskewed,itwasseenthatallothervariablesarepositively

skewed.Moreover,itwasdeterminedthattheskewnessofallvariablesiswithinnormallimits.

Inadditiontothisaspect,therelationshipamongthe variableswasalso evaluatedwiththe

helpofcorrelationcoefficientmatrix.Accordingtothecorrelationcoefficientvaluesdepictedin

Table4,itwasidentifiedthatcorporategovernancepredictorshavestrongrelationship(morethan

70%more)witheachother.Ontheotherside,itwasalsodeterminedthatgovernancevariables

have6%-12%correlationwith(FB/TB)itand11%–15%correlationwith(TAf/TA)it.

Furthermore, withrespecttothe stationaryanalysis of thevariables, “t” testdevelopedby

Levin,Lin, andChu(2002),“W” testdevelopedby,Im,Pesaran andShin (2003)and

“ADF-Fisher”panelunitroottestsdevelopedbyChoi(2001)wereusedinthestudy.Theresultsofthese

testsweregiveninTable5.Asaresultofthisanalysis,itwasconcludedthat allvariablesare

stationaryintheirlevelvalues.

In thesecond partofthe analysis,twostagessystemdynamic panel datamodelsbasedon

thestudiesofArellanoandBover(1995)andBlundellandBond(1998)wereused.Estimation

resultsofthisanalysiswereemphasizedinTable6.Inthisanalysis,themodelsof(3)and(4)

werepredictedrespectively.Becausethenumberofobservationpersectionislimited,onlyfirst

differencesof dependent variableswere consideredinthe analysis.In predictionprocess,the

variables,whichhavestatisticallyinsignificantvalues,wereeliminatedfromtheoriginalmodels

((3)and(4)).Whilemakingthisanalysis,wereachedrefinedmodelsthatgiveonlymeaningful

parametervalues.Inadditiontothissituation,bothfundamentalmodelsandthemostsignificant

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Table5

Panelunitroottests.

FB/TB TAf_/TA _CoC _GE

Statistic pvalue Lagc _Statistic _p_{value Lag}c _Statistic _p_value _Lagc _Statistic _p_value _Lagc

Levin,Lin andChuta −194.2820 0.0000 1 −30.9525 0.0000 1 −14.6914 0.0000 1 −19.2137 0.0000 1 Im,Pesaran andShin W-statb −30.2953 0.0000 1 −10.6278 0.0000 1 −6.5933 0.0000 1 −6.2059 0.0000 1 ADF– Fisher Chi-squareb 304.3140 0.0000 1 303.3100 0.0000 1 279.3450 0.0000 1 266.6110 0.0000 1 PP–Fisher Chi-squareb 282.0800 0.0000 1 278.8880 0.0000 1 265.1600 0.0000 1 222.1610 0.0000 1 PSAV RQ RoL VA

Statistic pvalue Lagc _Statistic _p_value _Lagc _Statistic _p_value _Lagc _Statistic _p_value _Lagc

Levin,Lin andChuta −6.7702 0.0000 1 −13.8715 0.0000 1 −12.4439 0.0000 1 −13.6670 0.0000 1 Im,Pesaran andShin W-statb −2.0158 0.0219 1 −4.3863 0.0000 1 −5.1215 0.0000 1 −6.5602 0.0000 1 ADF– Fisher Chi-squareb 186.8960 0.0008 1 219.3950 0.0000 1 242.1450 0.0000 1 281.8920 0.0000 1 PP–Fisher Chi-squareb 194.1880 0.0002 1 194.3720 0.0001 1 240.5320 0.0000 1 289.0190 0.0000 1

a_Null_hypothesis_assumes_common_unit_root_process.

b_Null_hypothesis_assumes_individual_unit_root_process.

c_Lag_length_selection_based_on_Shwarz_information_criterion.

Itwasdefinedthatallestimationspasseddiagnostictests.Additionally,Waldtestsshowthat

thesignificanceofthemodelsishigh.Furthermore,theresultsofSargantest,whichevaluates

the validityof instrumentalvariables, statethat thechoiceof thesevariablesiscorrect forall

models.Anotherconditionforthevalidityofthemodelsisthatresidualsshouldnothavesecond

order(AR(2))autocorrelationproblem.Arellano–Bondtestisusedfor thissituation.Thistest

evaluatesthefirstorder(AR(1))andsecondorder(AR(2))autocorrelationofthefirstdifferenceof

theresiduals.Thus,itisexpectedthatthereisnotatleastsecondorderautocorrelationinthefirst

differenceoftheresidualsinthistest.Accordingtotheresultsoftheanalysis,itwasidentified

thatthereisnotsecondorderautocorrelationinallmodels.Therefore,itcanbesaidthatGMM

estimationsareefficient.

The estimationresults ofthe models(3) and(4)explainthat thelags ofthe variablestake

significantandhighparametervalues.Inotherwords,thereishighpersistencyinforeignbank

operations. According to the estimation results of model (3), it was defined that governance

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Table6

Systemdynamicpaneldataestimations.

FB/TB TA/TA

Coeff. ztest Coeff. ztest Coeff. ztest Coeff. ztest

FB/TB(−1) 0.867 83.450** _0.870 _80.900** TAf_/TA(₋₁₎ _0.488 _102.210** _0.488 _127.840** CoC −0.739 −0.950 0.431 0.760 4.745 4.650** GE 5.651 10.030** _5.797 _11.020** _−0.962 _−0.890 PSAV −8.605 −10.160** _−8.786 _−10.160** _10.998 _12.030** _10.295 _11.720** RQ −1.353 −4.000** _−1.310 _−3.200** _−7.320 _−9.470** _−7.362 _−10.800** RoL 1.992 2.090* _2.175 _2.440* _−6.697 _−4.980** _−7.063 _−5.600** VA 1.124 1.570 4.552 4.670** c 6.306 9.860** 6.089 8.920** 18.229 29.220** 18.097 28.180** Waldtests Chisquare 21734.9 19713.77 38478.2 40128.57 [0.0000] [0.0000] [0.0000] [0.0000] Sargantests Chisquare 51.6109 51.39876 49.95764 49.75472 [0.1726] [0.1779] [0.2164] [0.2223] Arellano–Bondtests

ztest pvalue ztest pvalue ztest pvalue ztest pvalue

AR(1) −1.8100 0.0703 −1.8159 0.0694 −1.5338 0.1251 −1.5332 0.1252

AR(2) −1.0206 0.3075 −1.0116 0.3117 1.1005 0.2711 1.0998 0.2714

* _Show_z_test_in_the_significant_level_5%.

**_Show_z_test_in_the_significant_level_1%.

ofGEitandRoLitaffectdependentvariablespositivelywhereasPSAVitandRQithaveanegative

effectonit.Theseresultsmeanthattheratioofforeignbankstothetotalbanksgoesupwhen

effectivenessofthegovernmentincreasesandlegalinfrastructurebecomesstrong.Ontheother

hand,increaseinpoliticalstabilityandstrictregulationleadtodeclineinthenumberofforeign

banks.

Inadditiontothisissue,theestimationresultsofthemodel(4)showthatGEit andVAit are

insignificant. With respect to the significant variables, the coefficientsof RQit and RoLit are

negativewhileCoCitandPSAVithavepositivecoefficients.Itwasdeterminedthattheimportance

of foreign banks inthe market regardingthe size of total assetsincreases when thereis low

corruptionandhighpoliticalstability.Nevertheless,itwasalsoidentifiedthatimprovementsin

legalinfrastructureandstrictregulationcausesforeignbankstodecreasetheirassetsizeinthese

countries.

Accordingtotheanalysisresults,itwasseenthatthe variablesof CoCit,PSAVit andRoLit

givecontradictoryresultsinmodels(3)and(4)asforthesignofthecoefficients.Itwasthought

thattheresultsofmodel(4)aremoremeaningfulandconsistentwithrespecttotheeffectsofthe

firsttwovariablesondependentvariables.Itisunderstandablethatthecountries,inwhichthere

isincreaseinthefightingagainstcorruptionandpoliticalstability,becomeattractiveforforeign

banks.However,model(3)gavemorereasonableresultsregardingRoLitbecauseforeignbanks

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bothmodels.Thisaspectshowsthatforeignbanksarenotaffectedtheleveloftransparencyand

accountabilityinthecountries.

Inconclusion,itwasidentifiedthatforeignbankoperationsareinfluencedsignificantlybythe

governanceenvironmentofthecountries.Withinthiscontext,itwasdeterminedthatcorruption,

politic stability, legalsystemandflexibility inlegalregulations are important factorsfor this

situation.Inadditiontothem,itwasalsoseenthatforeignbankoperationsdependonthepast

eventsstrongly.Therefore,it canbeconcluded that foreignbankshavestrong connections to

themarketsinwhichtheyoperatedforalongtimeandtheysatisfytheexpectationsregarding

governanceinthesemarkets.

Conclusion

In thisstudy,we evaluatedthe relationshipbetweenforeign bankoperationsandcorporate

governancelevelsindevelopingcountries.Annualdataof65developingcountrieswhichhave

middle income level for the periods between 2004and 2013 was used. Moreover, we made

two stages system dynamic panel data estimation in this study. According to the results of

thisanalysis,itwasidentifiedthatthereisastrong relationshipbetweenoperationsofforeign

banks andgovernance levels of thecountries.Itwas determinedthat foreign bankoperations

aremostlyaffectedbythefactorsofcorruption,politicalstability,ruleoflawandflexibilityin

legalregulations.Foreignbank operationsarestrongerinthecountriesthathavelowpoverty,

highpoliticalstabilityandefficientlegalinfrastructureratherthanothercountries.However,it

wasalsodefinedthatforeignbankoperationsareaffectedbystrictlegalregulationnegatively.

Thissituationexplainsthatforeignbanksprefertoenterintothecountriesthathaveflexiblelegal

regulations.

Foreignbanksareimportantchancesfordevelopingcountriesinordertohavehighereconomic

growth.Therefore,influencingfactorsthataffectthedecisionsoftheforeignbanksarevery

signif-icant.Thisstudyprovidesempiricalsupporttotherelationshipbetweencorporategovernance

lev-elsofdevelopingcountriesandforeignownershiplevelsofthebanks.Whileconsideringtheresults

ofthisstudy,theauthoritiesofthesecountriescantakenecessaryactionsinordertoattractforeign

banks.

Appendix.

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TableA1

Middleincomecountries.a

Albania Egypt,ArabRep. Malaysia Serbia

Algeria ElSalvador Maldives SolomonIslands

Angola Fiji MarshallIslands SouthAfrica

Armenia Gabon Mauritania SriLanka

Azerbaijan Georgia Mauritius St.Lucia

Bangladesh Ghana Mexico St.VincentandtheGrenadines

Belarus Grenada Micronesia,Fed.Sts. Sudan

Belize Guatemala Moldova Suriname

Bhutan Guyana Mongolia Swaziland

Bolivia Honduras Montenegro SyrianArabRepublic

BosniaandHerzegovina India Morocco Tajikistan

Botswana Indonesia Myanmar Thailand

Brazil Iran,IslamicRep. Namibia Timor-Leste

Bulgaria Iraq Nicaragua Tonga

CaboVerde Jamaica Nigeria Tunisia

Cameroon Jordan Pakistan Turkey

China Kazakhstan Palau Turkmenistan

Colombia Kenya Panama Tuvalu

Congo,Rep. Kiribati PapuaNewGuinea Ukraine

CostaRica Kosovo Paraguay Uzbekistan

Coted’Ivoire KyrgyzRepublic Peru Vanuatu

Cuba LaoPDR Philippines Vietnam

Djibouti Lebanon Romania WestBankandGaza

Dominica Lesotho Samoa Yemen,Rep.

DominicanRepublic Libya SaoTomeandPrincipe Zambia

Ecuador Macedonia,FYR Senegal

a_Countries_have_been_selected_by_the_World_Bank_income_level_{classification.}_American_Samoa_was_not_considered

becauseofinsufficientdata.

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