Does Institutional Ownership and Bank Monitoring Affect Agency Conflicts? Evidence from an Emerging Market

Bagus Dwi Ariyono(1), Bowo Setiyono(2*)

(1) Faculty of Economics and Business, Universitas Gadjah Mada
(2) Faculty of Economics and Business, Universitas Gadjah Mada
(*) Corresponding Author


Introduction/Main Objectives: This study examines the effect of institutional ownership, proxied by government and private ownership, and bank monitoring on agency conflicts. Background Problems: The previous literature focused on agency conflicts, particularly those between managers and shareholders in developed markets, with much less evidence being presented from emerging ones. Novelty: We consider the role of creditors (the banks) in mitigating agency conflicts, and the managers’ irresponsible behavior, which in previous studies has been largely under-elaborated. Research Methods: Using 1,525 observations of 305 non-financial companies that were listed in the 2011-2015 period, we employ the generalized least squares method to deal with potential econometric concern such as autocorrelation and heteroscedasticity. Finding/Results: We find that institutional ownership and bank monitoring, proxied by the number of banks and the share of their loans, are negatively related to agency conflicts. Conclusion: Banks and institutional ownership lead to lower agency conflicts. However, one should mitigate free-rider problems emanated from these relationships.


agency conflict, institutional ownership, government ownership, bank monitoring

Full Text:



Agrawal, A., & Mandelker, G. N. (1990). Large shareholders and the monitoring of managers: The case of antitakeover charter amendments. Journal of Financial and Quantitative analysis, 143-161. doi:10.2307/2330821.

Ahmad, R., &Aliahmed, H.J., & Ab-Razak, N.H., (2008). Government ownership and performance: An analysis of listed companies in Malaysia. Working paper. Available at: or

Ahn, S., & Choi, W. (2009). The role of bank monitoring in corporate governance: Evidence from borrowers’ earnings management behavior. Journal of banking & finance, 33(2), 425-434.

Ang, J.S., & Ding, D.K. (2006). Government ownership and the performance of government-linked companies: The case of Singapore. Journal of Multinational Financial Management, 16(1): 64-88.

Ang, J. S., Cole, R. A., & Lin, J. W. (2000). Agency costs and ownership structure. the Journal of Finance, 55(1), 81-106.

Bathala, C. T., Moon, K. P., & Rao, R. P. (1994). Managerial ownership, debt policy, and the impact of institutional holdings: An agency perspective. Financial management, 38-50.doi: 10.2307/3665620.

Beck, T., Demirgüç-Kunt, A., & Levine, R. (2010). Financial institutions and markets across countries and over time: The updated financial development and structure database. The World Bank Economic Review, 24(1), 77-92.Available at

Boot, Arnoud W. A. (2000). Relationship banking: What do we know? Journal of Financial Intermediation 9 (1): 7-25.

Byers, S. S., Fields, L. P., & Fraser, D. R. (2008). Are corporate governance and bank monitoring substitutes: Evidence from the perceived value of bank loans. Journal of Corporate Finance, 14(4), 475-483.DOI: 10.1016/j.jcorpfin.2008.06.002.

Chen, J. (2001). Ownership structure as corpo­rate governance mechanism: Evidence from Chinese listed companies. Economics of Planning, 34(1-2), 53-72.doi:

Chen, X., Harford, J., & Li, K. (2007). Monitoring: Which institutions matter?. Journal of financial Economics, 86(2), 279-305.

Claessens, S., Djankov, S., &Lang, L.H.P. (2000), The separation of ownership and control in East Asian corporation.Journal of Financial Economics, 58 (1/2): 81-112.

Claessens, S., Djankov, S., Fan, J.P.H., &Lang, L. (2002), Disentangling the incentive and entrenchment effects of large sharehold­ings.Journal of Finance, Vol. 57(6):. 2741-2771.

Claessens, S., &Yurtoglu, B. (2013), Corporate governance in emerging markets: A survey.Emerging Markets Review, Vol. 15:1-33.

Chung, K.,& Lee, C. (2020). Voting methods for director election, monitoring costs, and institutional ownership. Journal of Banking & Finance. 113. 105738. 10.1016/ j.jbankfin.2020.105738.

Dass, N., & Massa, M. (2011). The impact of a strong bank-firm relationship on the borrowing firm. The Review of Financial Studies, 24(4), 1204-1260. doi 10.2307/20869268.

David, P., & Kochhar, R. (1996). Barriers to effective corporate governance by institu­tional investors: Implications for theory and practice. European Management Journal, 14(5), 457-466.

Diamond, D.W. (1984). Financial intermediation and delegated monitoring. Review of Economic Studies, 15(3): 393-414. 10.2307/2297430.

Demirgüç-Kunt, A.,& Levine, R.E. (1999). Bank-based and market-based financial systems: Cross-country comparisons. World Bank Policy Working Paper No. 2143. Available at SSRN:

Delis, M. D., Kokas, S., & Ongena, S. (2017). Bank market power and firm performance. Review of Finance, 21(1), 299-326.

Demsetz, H. (1983). The Structure of Ownership and the Theory of the Firm. The Journal of Law & Economics, 26(2), 375-390. Available from

Fama, E. F. (1985). What's different about banks?. Journal of monetary economics, 15(1), 29-39.

Ferreira, M. A., & Matos, P. (2008). The colors of investors’ money: The role of institu­tional investors around the world. Journal of financial economics, 88(3), 499-533.

Fleming, G., Heaney, R., & McCosker, R. (2005). Agency costs and ownership structure in Australia. Pacific-Basin Finance Journal, 13(1), 29-52.

Florackis, C. (2008). Agency costs and corporate governance mechanisms: evidence for UK firms. International Journal of Managerial Finance. doi: 10.1108/17439130810837375.

Fok, R. C., Chang, Y. C., & Lee, W. T. (2004). Bank relationships and their effects on firm performance around the Asian financial crisis: Evidence from Taiwan. Financial Management, 89-112.

Freixas, X.,&Rochet,J., (2008) Microeconomics of Banking, 2nd Edition, The MIT Press,

Gillan, S.L., &Starks, L.T., (2000). Corporate governance proposals and shareholder activism: the role of institutional investors. Journal of Financial Economics, 57, 275-305.

Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American economic review, 76(2), 323-329.

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

La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1999). Corporate governance around the world. Journal of Finance, 54(2), 471-517.

Lin, Y. R., & Fu, X. M. (2017). Does institutional ownership influence firm performance? Evidence from China. International Review of Economics & Finance, 49, 17-57.

Lin, F. L., & Lin, H. L. (2013). Ultimate controller ownership and firm value in Taiwan. Emerging Markets Finance and Trade, 49(1), 68-81.

McKnight, P. J., & Weir, C. (2009). Agency costs, corporate governance mechanisms and ownership structure in large UK publicly quoted companies: A panel data analysis. The quarterly review of economics and finance, 49(2), 139-158.

Muniandy, P., Tanewski, G., & Johl, S. K. (2016). Institutional investors in Australia: Do they play a homogenous monitoring role?. Pacific-Basin Finance Journal, 40, 266-288.

Noe, T. H. (2002). Investor activism and financial market structure. The Review of Financial Studies, 15(1), 289-318.Retrieved from

Otoritas Jasa Keuangan (OJK). (2017). Capital Market Statistics December- 4 2017. accessed January, 11 2018.

Otoritas Jasa Keuangan (OJK). (2016). Indonesia Banking Statistics December-2016. accessed January, 20 2018.

Qi, D., Wu, W., & Zhang, H. (2000). Share­holding structure and corporate performance of partially privatized firms: Evidence from listed Chinese companies. Pacific-Basin Finance Journal, 8(5), 587-610.

Setiawan, R. (2012). Bank Monitoring, Kebi­jakan Perusahaan, dan Kinerja Perusahaan. Universitas Gadjah Mada: Disertasi.

Setiyono, B., & Tarazi, A. (2014). Disclosure, ownership structure and bank risk: Evidence from Asia. In 27th Australasian finance and banking conference. Available at SSRN: or

Shepherd, J., Tung, F., & Yoon, A. (2007). Cross-monitoring and corporate governance. Available at SSRN 914229.

Shleifer, A., & Vishny, R. W. (1997). A Study of Corporate Governance. The Journal of Finance, LII, 2.

Shleifer, A., & Vishny, R. W. (1986). Large shareholders and corporate control. Journal of political economy, 94(3, Part 1), 461-488.

Singh, M., & Davidson III, W. N. (2003). Agency costs, ownership structure and corporate governance mechanisms. Journal of Banking & Finance, 27(5), 793-816.

Wiwattanakantang, Yupana. "Controlling shareholders and corporate value: Evidence from Thailand." Pacific-Basin Finance Journal 9, no. 4 (2001): 323-362.

Yu, H. C., Sopranzetti, B. J., & Lee, C. F. (2012). Multiple banking relationships, managerial ownership concentration and firm value: A simultaneous equations approach. The Quarterly Review of Economics and Finance, 52(3), 286-297.


Article Metrics

Abstract views : 4416 | views : 3641


  • There are currently no refbacks.

Copyright (c) 2020 Journal of Indonesian Economy and Business

Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Journal of Indonesian Economy and Business


Editorial Team
Focus and Scope
Peer Review Process
Publication Ethics
Screening for Plagiarism


Author Guidelines
Submission Guidelines
Online Submissions
Copyright Notice
Privacy Statement
Author Fees


Author Pack
Submission Form & Manuscript Template



Reviewer Guidelines
Reviewer Acknowledgement



General Search
Author index
Title index



The Journal of Indonesian Economy and Business (print ISSN 2085-8272; online ISSN 2338-5847) is published by the Faculty of Economics and Business Universitas Gadjah Mada, Indonesia. The content of this website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License

© 2019 Journal of Indonesian Economy and Business 
 Visitor Statistics