The Causality between Corporate Governance Practice and Bank Performance: Empirical Evidence from Indonesia

Cynthia A. Utama; Haidir Musa

doi:10.22146/gamaijb.5481

The Causality between Corporate Governance Practice and Bank Performance: Empirical Evidence from Indonesia

Cynthia A. Utama, Haidir Musa

(Submitted 1 December 2014)

(Published 12 September 2011)

Abstract

The aim of this study is to examine the existence of causality between corporate governance practice and performance of commercial banks in Indonesia. We also investigate the influence of age, capital adequacy, and type of commercial banks on bank performance and examine the influence of the bank size, foreign ownership, and listing status on corporate governance practice. The result shows that corporate governance practice, bank size and capital adequacy ratio have positive influences on bank performance in Indonesia. However, bank performance does not influence corporate governance practice. This study also finds that regional banks have better performance than private banks. The results of the study support the Central Bank’s efforts to enhance CG practices in the banking sector, to strenghten banks’ capital base and its policy to encourage banks to merge to become larger.

Full Text: PDF

DOI: 10.22146/gamaijb.5481

References

Adams, R. B., and H. Mehran. 2003. Is corporate governance different for bank holding companies? Economic Policy Review 9: 123 – 142.

Adams, R. B., and H. Mehran. 2005. Corporate performance, board Structure, and its determinant in the Banking Industry. Working Paper. http://ssrn.com/abstract= 302593.

Aigner, D., C. Lovell, and P. Schmidt. 1977. Formulation and estimation of stochastic frontier function models. Journal of Econometrics 6: 21–37.

Akhigbe, A., and A. D. Martin. 2008. Influence of disclosure and governance on risk of US financial service firms following Sarbanex-Oxley. Journal of Banking and Finance 32: 2124 – 2135.

Akhigbe, A., and J. E. McNulty. 2003. The profit efficiency of small US commercial banks. Journal of Banking and Finance 27: 307 - 325.

Akhigbe, A., and J. E. McNulty. 2011. Bank monitoring, profit efficiency, and the commercial lending business model. Journal of Economics and Business 63: 531-551.

Altunbas, Y., L. Evans and P. Molyneux. 2001. Bank Ownership and Efficiency. Journal of Money, Credit and Banking 33 ( 4): 926-954.

Andres, P., and E. Vallelado. 2008. Corporate governance in banking: The role of board of director. Journal of Banking and Finance 32: 2570 – 2580.

Asian Development Bank. 2000. Corporate Governance and Finance in East Asia: A Study of Indonesia, Republic of Korea , Malaysia, Phillipines, and Thailand Volume One. http://www.adb.org/Documents/Books/Corporate_Governance/default.asp.html.

Bank Indonesia. 2004. Arsitektur Perbankan Indonesia. http://www.bi.go.id/ web/id/Perbankan/Arsitektur+Perbankan+Indonesia/

Bank Indonesia. 2006. Peraturan Bank Indonesia Nomor 8/4/PBI/2006 Tentang Pelaksanaan Good Corporate Governance Bagi Bank Umum. http://www.bi.go.id/web/id/ Peraturan/Perbankan/pbi+8406.htm.

Bank Indonesia. 2006. Peraturan Bank Indonesia Nomor 8/14/PBI/2006 Tentang Perubahan Atas Peraturan Bank Indonesia Nomor 8/4/PBI/2006 Tentang Pelaksanaan Good Corporate Governance Bagi Bank Umum. http://www.bi.go.id/web/id/Peraturan/ Perbankan/pbi_81406.htm.

Bank Indonesia. 2007. Surat Edaran Kepada Semua Bank Umum di Indonesia Perihal Pelaksanaan Good Corporate Governance Bagi Bank Umum. http://www.bi.go.id/web/id/Peraturan/Perbankan/pbi_81406.htm.

Bank Indonesia. 2007. Peraturan Bank Indonesia Nomor:9/13/PBI/2007 Tentang Kewajiban Modal Minimum Bank Umum dengan Memperhitungkan Risiko Pasar. http://www.bi.go.id/web/id/Peraturan/Perbankan/pbi_091307.htm

Berger, A. N., G. R. G. Clarke, R. Cull, L. Klapper, and G. F. Udell. 2005. Corporate governance and bank performance: A joint analysis of the static, selection, and dynamic effects of domestic, foreign, and state ownership. Journal of Banking and Finance 29: 2179-2221.

Bhagat, S., and B. Black. 2002. “The non-correlation between board independence and long-term firm performance”. Journal of Corporation Law 27: 231–274.

Bhagat, S., and J. H. Jefferris. 2002. The Econometrics of Corporate Governance Studies.The MIT Press, Cambridge, Massachusetts.

Bhattacharyya, A., C.A.K. Lovell, and P. Sahay. 1997. The Impact of Liberalization on the Productive Efficiency of Indian Commercial Banks, European Journal of Operational Research 98: 332-345.

Black, B., H. Jang, and W. Kim. 2006. Does corporate governance predict firms market value? Evidence from Korea. ECGI Working Paper Series, http://ssrn.com/abstract=311275 .

Bodie, Zvi, A. Kane, and A. J. Marcus. 2009. Investments Eighth Edition. Singapore : McGraw Hill International Edition.

Bolton, B., and S. Bhagat, S. 2008. Corporate Governance and Firm Performances. Journal of Corporate Finance 14: 257 – 273.

Bonin, J., P. I. Hasan, and P. Watchel. 2005. Bank performance, efficiency and ownership in transition countries. Journal of Banking and Finance 29: 31 – 53.

Boyd, J. E, Levine, R., Smith, B.D. (2001). The impact of inflation on financial sector performance Journal of Monetary Economics 47: 221 – 248.

Brooks, C. 2007. Introductory Econometrics for Finance. United Kingdom : Cambridge University Press.

Brown, L. D. and M. L. Caylor. 2006. “Corporate Governance and Firm Valuation”. Journal of Accounting and Public Policy 25: 409 – 434.

Caprio, G., L. Laeven, and R. Levine. 2007. Governance and bank valuation. Journal of Financial Intermediation 16: 584 – 617.

Canhoto, Ana and Jean Dermine. 2003. A note on banking efficiency in Portugal, New vs Old Banks”. Journal of Banking and Finance 27: 2087 – 2098.

Chang, C. E., I. Hasan and W.C. Hunter, W. C. 1998. Efficiency of multinational banks: an empirical investigation ‘, Applied Financial Economics 8 (6): 689-696

Choe, H., and B.S. Lee. 2003. Korean bank governance reform after the Asian financial crisis. Pacific-Basin Finance Journal 11: 483-508.

Choi, S., and I. Hasan. 2005. Ownership, governance, and bank performance: Korean experience. Financial Markets, Institutions, and Instruments 14(4), New York: Blackwell Publishing Inc.

Christopher, M.F.Y. 2009. The relationship between corporate governance and bank performance in Hong Kong, Dissertation, Auckland University of Technology, http://aut.researchgateway.ac.nz/bitstream/10292/739/4/YungMF.pdf

Claessen, S., A. D. Kunt, and H. Huizinga. 2001. “How Does Foreign Entry Affect Domestic Banking Markets?”. Journal of Banking and Finance vol 25, pp 891 – 911.

Coleman, A. D. F., N. Esho, and I.G. Sharpe. 2006. Does bank monitoring influence loan contract terms? Journal of Financial Services Research 30: 177–198.

Cornett, M.M., J.J. McNutt, and H. Tehranian. 2009. Corporate governance and earnings management at large US bank holding companies. Journal of Corporate Finance 15: 412-430.

Cooper, E. W. 2009. Monitoring and governance of private banks. The Quarterly Review of Economics and Finance vol 49, pp 253 – 264.

Dahlquist, M., and G. Robertsson. 2001. Direct foreign ownership, institutional investors, and firm characteristics. Journal of Financial Economics 59: 413-440.

Damodaran, A. 2002. Investment Valuation (2nd Edition). New York : John Wiley & Sons, Inc.

DeAngelo, H., and L. DeAngelo. 1985. Managerial ownership of voting rights: a study of public corporation with dual classes of common stock. Journal of Financial Economics 14: 33-69.

DeYoung, R., and I. Hasan. 1998. The performance of the Novo bank commercial bank : A profit efficiency approach. Journal of Banking and Finance 22: 565-587.

DeYoung, R., L.G. Golberg, and L.J. White. 1999. Youth, adolescence, and maturity of banks : credit availability to small business in an era of banking consolidation. Journal of Banking and Finance 23: 463 – 492.

De Young, R. and D.E. Nolle. 1996. Foreign-Owned Banks in the United States: Earning Market Share or Buying It? Journal of Money, Credit, and Banking 28 (4): 622-636.

Douma, S., R. George, and R. Kabir. 2003. Foreign and domestic ownership, business group, and firm performance: evidence from large emerging market. Working Paper. Tilburg University.

Fama, E. F. 1980. Agency problem and the theory of the firm. The Journal of Political Economy 88 (2): 288 – 307.

Fama, E. F., and M.C. Jensen. 1983. Separation of ownership and control. Journal of Law and Economics XXVI (June).

Goldberg, L.S., B.G. Dages, and D. Kinney. 2000. Foreign and domestic bank participation in emerging markets: lessons from Mexico and Argentina. Working paper 7714, http://www.nber.org/papers/w7714.

Gompers, P., J. Ishii, and A. Metrick. 2003. Corporate Governance and Equity Prices. The Quarterly Journal of Economics 118 (1): 107-155.

Hadad, M. D., A. Sugiarto, W. Purwanti, M. J. Hermanto, and B. Arianto. 2003. Kajian mengenai Struktur Kepemilikan Bank di Indonesia, www.bi.go.id/NR/...5D87.../Kajian mengenai Struktur kepemilikan Bank.pdf

Hadad, M. D., W. Santoso, D. S. Besar, I. Rulina, W. Purwanti, and R. Satria. 2011. Fungsi Intermediasi Bank Asing dalam Mendorong Pemulihan Sektor Riil di Indonesia, http://www.bi.go.id/NR/rdonlyres/1414FFFC-16AE-4506-9513-BAF6D12B764A/7819/BankAsing.pdf.

Handy. 2008. Hubungan Simultan antara Nilai Perusahaan dengan Praktek Corporate Governance di Bursa Efek Indonesia. Thesis, Fakultas Ekonomi Universitas Indonesia.

Havrylchyk, O. 2006. Efficiency of the polish banking industry: foreign versus domestic bank.. Journal of Banking and Finance 30: 1975 – 1996.

Hermalin, B. E., and M.S. Weisbach. 1988. The determinant of board composition. The RAND Journal of Economics 19 (4): 589 – 606.

Hermalin, B. E., and M. S. Weisbach. 1991. The effect of board composition and direct incentives on firm performance. Financial Management 20 (4): 101 – 112.

Jensen, M. C., and W. H. Meckling. 1976. Theory of the firm: managerial behavior, agency Cost and ownership structure. Journal of Financial Economics 3 (4): 305-360.

Kanchel, I. 2007. Corporate governance: measurement and determinant analysis. Managerial Auditing Journal 22 (8): 740 – 760.

Kim, P. K., and D. Rasiah. 2010. Relationship between corporate governance and bank performance in Malaysia during the pre and post Asian financial crisis. European Journal of Economics, Finance, and Administrative Sciences 21: page?

La Porta, R., F. Lopez-de-Silanez, and A. Shleifer. 2002. Government ownership of banks. The Journal of Finance 57 (1): 265 – 301.

Levine, R. 2004. The Corporate governance of banks : A concise discussion of concept and evidence. Working Paper 3404, World Bank Policy Research.

Lin, X. And Y. Zhang. 2009. Bank ownership reform and bank performance in China. Journal of Banking and Finance 33: 20-29.

Mamoghli, C., and R. Dhouibi. 2009. Bank corporate governance and insolvency risk, Evidence from an emerging market. Working Paper Series, http://ssrn.com/abstract=1391878.

Manlagnit, M. C. V. 2011, Cost efficiency, determinants, and risk preferences in banking: A case of stochastic frontier analysis in the Phillipines. Journal of Asian Economics 22: 23-35.

Meeusen, W., and J. van der Broeck. 1977. Efficiency estimation from Cobb–Douglas production functions with composed error. International Economic Review 18: 435–444.

Micco, A., U. Panizza, and M. Yanez. 2007. Bank ownership and performance. Does politics matter?. Journal of Banking and Finance 31: 219 – 241.

Naceur, S. B., and M. Kandil. 2009. The impact of capital requirements on banks cost of intermediation and performance: the case of Egypt. Journal of Economics and Business 61: 70 – 89.

Nachrowi, N. D., and H. Usman. 2005. Penggunaan Teknik Ekonometri Edisi Revisi. Jakarta : PT RajaGrafindo Persada.

Nachrowi, N. D., and H. Usman. 2006. Pendekatan Populer dan Praktis Ekonometrika Untuk Analisis Ekonomi dan Keuangan. Jakarta : Lembaga Penerbit Fakultas Ekonomi Universitas Indonesia.

OECD. 1999. OECD Principle of Corporate Governance.

Peraturan Pemerintah Republik Indonesia. 1999. Peraturan Pemerintah Republik Indonesia Nomor 29 Tahun 1999 Tentang Pembelian Saham Bank Umum. http://www.bpkp.go.id/unit/hukum/pp/1999/029-99.pdf

Rhoades, S., 1998. The efficiency effects of bank mergers: An overview of case studies in nine mergers. Journal of Banking and Finance 22 (3): 273–291.

Roseinstein, S., and J.G. Wyatt. 1990. Outside directors, board independence, and shareholder wealth. Journal of Financial Economics 26: 176-191.

Saunders, A., and M. Cornett. 2005. Financial Markets and Institutions: An Introduction to the Risk Management Approach, Boston, Mass: McGraw-Hill/Irwin.

Shleifer, A., and R. W. Vishny. 1997. A Survey of corporate governance. Journal of Finance vol 52 (2): 737 – 783.

Siamat, D. 2004. Manajemen Lembaga Keuangan Edisi Keempat. Jakarta : Lembaga Penerbit Fakultas Ekonomi Universitas Indonesia.

Refbacks

There are currently no refbacks.