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Fang, Yiwei, Hasan, Iftekhar, Leung, Woon Sau and Wang, Qingwei 2019. Foreign ownership,
bank information environments, and the international mobility of corporate governance. Journal of
International Business Studies 50 (9) , pp. 1566-1593. 10.1057/s41267-019-00240-w file
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00240-w>
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Foreign Ownership, Bank Information Environments, and
the International Mobility of Corporate Governance
Yiwei Fang,
1
Iftekhar Hasan,
2
†
Woon Sau Leung,
3
and Qingwei Wang
4
,d
ABSTRACT
This paper investigates how foreign ownership shapes bank information environments. Using a sample of
listed banks from 60 countries over 1997-2012 we show that foreign ownership is significantly associated
with greater (lower) informativeness (synchronicity) in bank stock prices. We also find that stock returns
of foreign-owned banks reflect more information about future earnings. In addition, the positive association
between price informativeness and foreign ownership is stronger for foreign-owned banks in countries with
stronger governance, stronger banking supervision, and lower monitoring costs. Overall, our evidence
suggests foreign ownership reduces bank opacity by exporting governance, yielding important implications
for regulators and governments.
Keywords: Multiple regression analysis; Agency theory; Internationalization theories and foreign market
entry; International Financial Integration; Foreign bank ownership; Stock price synchronicity
JEL Classification: C30; F36; G15; G21; G30; G38.
1
Illinois Institute of Technology, Stuart School of Business, Chicago, IL, USA.
2
Gabelli School of Business, Fordham University, New York, New York 10023, USA; Bank of Finland, FI-00101
Helsinki, Finland; University of Sydney Business School, NSW, Australia.
†
Corresponding author. E-mail: ihasan@fordham.edu.
3
University of Edinburgh Business School, 29 Buccleuch Place, Edinburgh EH8 9JS, UK
4
Cardiff Business School, Cardiff University, Cardiff CF10 3EU, UK.
d
Centre for European Economic Research, L7 1, 68161 Mannheim, Germany.
We are grateful for helpful comments from two anonymous reviewers and the area editor for significant suggestions
and help. We also thank Davide Avino, Jie Chen, Hans Degryse, Julian Franks, Simone Giansante (discussant), Marc
Goergen, Liuling Liu, Jens Hagendorff, Khelifa Mazouz, Wei Song, Yuliang Wu, Jason Xiao, Tina Xu, Shuxing Yin,
and Hong Zou, as well as participants at the 2016 Empirical Finance Group Conference (Cardiff). All remaining errors
are our own.
2
1 INTRODUCTION
Despite an extensive body of international business (IB) research on globalization (see a review by Verbeke
et al., 2018), researchers pay relatively little attention to banking globalization. However, banks are
instrumental in promoting IB because of their roles in financing global trade and foreign investments of
multinational companies (MNCs) (Niepmann and Schmidt-Eisenlohr, 2017), as well as in maintaining the
stability of international financial systems (Laeven, 2013). The 2008-09 global credit crisis is a vivid
example of how instability in the banking sectors could impair global trade and investment flows.
Many argue that weak bank transparency is a major cause of the crisis because poor-quality
information makes asset risk opaque and the lack of disclosure aggravates conflicts between different bank
stakeholders (Healy and Palepu, 2001; Hyytinen and Takalo, 2002; Bushman and Williams, 2012; Bushman,
2014). Over the decades, various international institutions, including the International Monetary Fund, the
Basel Committee on Banking Supervision (BCBS), and the Financial Stability Board, have proposed
prudential regulations for banks. They have also campaigned for greater emphasis on effective corporate
governance and improved disclosure for banks. For instance, Pillar Three of the Basel II Accord focuses
specifically on enhancing the transparency of the global banking sectors by raising bank disclosure
requirements and strengthening market discipline (BCBS, 2015). A number of scholars, such as Berlin et
al. (1991), Bhattacharya et al. (1998), Laeven (2013), and Bushman (2014), also advocate increased
transparency in banking systems. Given these increasing calls from policymakers and scholars, and
considering the importance of bank stability to global trade, it is essential for IB researchers to have a better
understanding of what enhances bank transparency within a globalization context to ensure efficacy and
sustainability in international trade.
In this paper, we examine whether foreign ownership increases bank transparency through
improved corporate governance. In an agency-theory framework, effective governance, such as monitoring
by owners, boards of directors, and other market participants, could improve corporate transparency by
reducing managers’ incentives to exploit or hoard private information for their own advantage (see, e.g.,
Bertrand and Mullainathan, 2003; Ferreira and Laux, 2007; Gul et al., 2011; Armstrong et al., 2012;
Armstrong et al., 2014). Also, a recent, growing body of IB and international finance literature theorizes
and documents that foreign owners who actively monitor corporate insiders play a significant role in
exporting corporate governance to subsidiaries or invested entities in host countries (Gillian and Starks,
2003; Ferreira and Matos, 2008; Aggarwal et al., 2011; He et al., 2013; Han, 2015; Bena et al., 2017;
Cumming et al., 2017).
In line with this governance-mobility view, several cross-border M&A studies show that target
firms benefit from importing superior governance and contracting devices from acquirers headquartered in
good-governance countries (Ferreira and Matos, 2008; Martynova and Renneborg, 2008; Aggarwal et al.,
3
2011; Ellis et al., 2017; Renneboog et al., 2017). The banking literature also suggests that foreign owners
bring better governance and risk-management systems to their local counterparts, in turn improving
efficiency (Berger et al., 2009). Based on these arguments, we hypothesize that foreign ownership is
positively associated with bank transparency because governance spills over from home countries with
stronger governance or banking regulations.
To test this hypothesis, we measure bank transparency by the amount of firm-specific variation in
bank stock returns, which reflects the incorporation of private information (see, e.g., Morck et al., 2000;
Jiang et al., 2009). When information environments improve, stock prices incorporate more variation in
firm-specific factors and thus synchronize less with market factors. Following this literature, our dependent
variable is price synchronicity, estimated as the logistic-transformed R
2
from an expanded market model.
Our explanatory variable of interest is an indicator for majority foreign ownership (Foreign) that equals 1
for banks with 50% or more foreign ownership, and 0 otherwise. Using a sample of 710 banks from 60
countries over 1997-2012, our baseline results show that foreign bank ownership is associated with
significantly lower (higher) price synchronicity (informativeness). This relationship is robust to alternative
fixed effects, estimation approaches, sample periods, standard errors, and use of discretionary loan loss
provisions as an alternative proxy for bank transparency.
A potential concern is endogeneity. Unobserved country or bank characteristics that codetermine
foreign ownership and price synchronicity could bias our estimates. Additionally, foreign investors may
prefer to invest in countries with more transparent banking systems (Leuz et al., 2009). Because the
treatment status is not randomly assigned to the sample banks, our results may be subject to potential
selection issues or reverse causality. To address these concerns, we examine the results using bank fixed
effects, instrumental variable estimation, and dynamic panel generalized method of moments (GMM)
estimation, all showing that endogeneity does not drive our results.
Another concern recent studies raise (see, e.g., Dasgupta et al., 2010; Xing and Anderson, 2011) is
that stock price synchronicity may be noisy and unreliable in capturing information flows. To address this,
we study the extent to which stock prices incorporate future earnings information, and we examine its
relationship to foreign bank ownership. Our results show that stock prices of foreign-owned banks contain
significantly more future earnings information than those of local banks, consistent with our hypothesis.
To test the theory of governance mobility, we evaluate whether the quality of corporate governance
and banking regulations in the home countries governs the relationship between foreign bank ownership
and stock price informativeness. If foreign owners export better governance practices and improve bank
information environments, then increases in stock price informativeness should be more pronounced for
foreign-owned banks from home countries with relatively strong corporate governance or banking
regulations. Moreover, because monitoring foreign subsidiaries and invested companies incurs significant
4
transportation and communication costs (Degryse and Ongena, 2005; Mian, 2006; Kang and Kim, 2008),
physical distance between the home and host countries could reduce the spillover of corporate governance
across borders. Our results support these predictions.
Our paper makes several important contributions to the literature. First, we add to an emerging
body of IB literature theorizing and documenting that governance does indeed travel abroad through, for
example, foreign ownership, cross-border M&As, etc. (see, e.g., Aguilera, et al., 2017; Cumming, et al.,
2017; Ellis et al., 2017; Miletkov et al., 2017). We complement this literature by analyzing banks, an
industry of central importance to IB regarding the stability of global trade, revealing that foreign bank
ownership is another effective channel through which governance moves across borders.
Second, we add to the growing literature on the economic consequences of banking globalization.
1
However, relatively few studies analyze its role in shaping banks’ information environments. This question
has far-reaching implications for IB because bank opacity, often considered a major cause of banking crises,
could seriously disrupt global trade. Our findings uncover a bright side of banking globalization in
mitigating information asymmetry.
Third, using more general samples of firms, our paper relates to studies on the link between foreign
investors and the information content of stock prices (see, e.g., Gul et al., 2010). For instance, He et al.
(2013) and Han (2015) show that foreign shareholders enhance price informativeness due to a greater ability
in processing value-relevant information. However, our paper differs from theirs in several ways. First, our
sample contains global banks; theirs consist of mainly nonfinancial firms. Banks are distinct from
nonfinancial firms in that they are opaque (Morgan, 2002), highly levered, and interconnected; their failures
could have adverse systemic consequences that disrupt global markets and trade. As such, we extend the
significant contribution these studies make by offering practical implications regarding market and trade
stability for regulators as well as scholars in IB. Second, our theoretical framework, motivated by recent,
growing IB literature, asserts that increased corporate governance exported by foreign bank owners
enhances information environments. Although more intense monitoring by foreign shareholders is a
potential channel that He et al. (2013) consider, their study only analyzes the host countries’ governance
characteristics. However, because we know the home countries of foreign-owned banks, we are able to
examine in a governance context whether relative distance between home and host countries explains price
informativeness, directly testing the theory.
Our findings yield several policy implications. First, despite the growing literature, researchers still
do not fully understand the costs and benefits of foreign bank ownership, as well as their tradeoffs. Some
studies document a few dark sides of foreign banks, such as cherry-picking elite clients and not venturing
out of urban territories in host markets. They conclude that foreign banks fail to enhance domestic credit
and financial inclusion (Detragiache et al., 2008; Allen et al., 2011; Claessens and van Horen, 2014; Beck
