External Governance And Commercial Bank Performance

In recent years,with the deepening of the market-oriented reform of China's economic system,corporate governance has gradually become a hot issue in corporate finance research.In addition to improvements in the company's internal governance structure,the development and improvement of the external governance environment is also extremely important and has a clear policy relevance.Commercial banking has played a particularly important role in the development of China's national economy,so it is closely supervised by the regulatory authorities.While abundant researches have explored the role of internal governance,how external governance mechanism can be rationalized and utilized together with internal governance for the development and stability of the banking industry.This thesis is therefore with great theoretical and practical significance.A good external governance environment can ensure the stable operation of commercial banks and help them achieve better performance.This point has a solid theoretical foundation in the relevant literature.Existing research from the industrial organization theory,the principal-agent theory and the information asymmetry theory provides effective support to the relationship between external governance environment and bank performance.However,empirical research in this direction is lacking,and with insufficient investigation deep into the mechanism behind.This study is therefore designed to explore these issues using comprehensive data analysis and detailed empirical research.On the one hand,the application of relevant theories in China's banking industry is verified,on the other hand,it is expected to provide valuable evidence to the authorities for the efficient and orderly operation of China's commercial banks.After decades of development and reform,China's commercial banking industry has been diversified from the state-owned banks under the planned economy system to a rich diversification of market-oriented system.Its operational environment has been constantly improving and maturing.However,due to the unbalanced economic development in the vast regions of China,the market backgrounds and operating models of various types of banks are quite different,leading to a great variety of external governance environment across the country.Following the guidance of relevant theories,this thesis chooses three external governance proxies,namely,market competitiveness,external market environment,and media supervision to study their impacts on the return and risk of commercial banks in China,and further explores the mechanisms of how bank performance improves under each governance environment.Research shows that good external governance environment can indeed have a positive impact on the performance of banks: improving their profitability,also can effectively suppress the operational risk of banks.In terms of transmission mechanism,we find that the impact of external governance environment on bank performance is mainly through an incentive mechanism and a supervision mechanism.Among them,external governance represented by market competition and external market environment can stimulate the enthusiasm of management,thereby improving operational efficiency;the media,as a third party,can effectively improve the transparency of information,generate additional supervision mechanism,and reduce the behavior of bank managers to harm the interests of shareholders.The innovation of this thesis mainly includes the following aspects: First,we use detailed empirical data analysis and provides an effective basis for the performance of commercial banks in China.Combining industrial organization theory,principal-agent theory and information asymmetry theory,we systematically demonstrate the impact of external governance environment on the performance of commercial banks in China and its influencing mechanism,enriches and expands the relevant literature.Second,in terms of the measurement of market competition,the time and address of all bank branches collected from the China Banking Regulatory Commission are used,which is comprehensive and objective,and can greatly reduce the impact of endogenous problems on regression results.Third,in the measurement of media supervision,with the help of large sample data,we use text mining method to build the degree of media supervision on each bank.Once again,the constructed variable can provide useful and representative information to the empirical questions.Fourth,we introduce external governance environment into the analytical framework of commercial banks and explain the impact mechanism of external governance environment on the performance of commercial banks.The incentive and supervisory functions of external governance environment are verified from the micro level.These conclusions not only enrich the relevant literature,but also help to further understand the relationship between external governance environment and the performance of commercial banks in China,thus providing reference for government to formulate policies and improve the performance of commercial banks.The specific research contents of this thesis include six chapters:The first chapter introduces the relevant research background,and further leads to the main issues to be studied in this thesis.They are: the impact of external competitive environment,external market environment and media environment on bank performance.And then it elaborates the research significance and related concepts before briefing the research contents,research methods and main innovations.The second chapter is related theory and literature review.In this chapter,firstly,the relevant theories of external governance environment are explored,including the industrial organization theory,the principal-agent theory,and the information asymmetry theory.Empirical researches on the relationship between external governance environment and bank performance(profitability and risk)are reviewed.We also explore the relevant literature on the mechanism of the external governance environment,including the reasons for the external governance environment to generate governance mechanisms and the ways to evaluate the governance mechanism of the external governance environment.Finally,we summarize the existing research to reveal the gaps before highlighting the added value of this thesis.Profitability and risk taking of banks are normally considered as the two most important aspects of bank performance.The third chapter analyses the impact of external governance environment on the profitability of banks from three aspects:external competitive environment,external market environment and media environment.The results show that: first,the external competitive environment can improve the profitability of commercial banks.Second,the external market environment affects the profitability of commercial banks: the higher the marketization process,the lower the level of government intervention,and then the stronger the profitability of commercial banks.Third,media environment will also affect the profitability of commercial banks,though the total media coverage has no significant impact on the profitability of commercial banks.Only and authoritative media reports,policy-oriented media reports and market-oriented media reports affect the profitability of commercial banks.Further analysis shows that the external competitive environment and marketization process can improve the profitability of commercial banks by reducing agency costs.After dividing price effect and scale effect,we find that the external competitive environment can affect the net interest margin through both effects,while the market process can only affect the net interest margin through price effect.The fourth chapter examines the impact of external governance environment on bank risk.In this chapter,we first analyze the impact of external governance environment on the risk-taking of commercial banks from the perspectives of external competitive environment,external market environment and media environment.Second,we examine whether the external governance environment helps commercial banks avoid the moral hazard caused by deposit insurance.The results show that: first,only the external market environment affects the risk of commercial banks in the external governance environment.Specifically,the higher the degree of marketization and the lower the degree of government intervention,the smaller the risk-taking of commercial banks.Second,the deposit insurance system increases the level of risk-taking in commercial banks.Improvement of marketization process and the reduction of government intervention will reduce the moral hazard caused by the deposit insurance system.Further research finds that the marketization process and government intervention mainly reduce the risk by improving the performance of commercial banks and reducing the fluctuation of performance.The introduction of deposit insurance system can reduce the performance of commercial banks and increase the fluctuation of performance,while the marketization process can alleviate the adverse effects of the introduction of deposit insurance system.The fifth chapter studies the mechanisms of the external governance environment.This chapter uses bank efficiency and earnings management to study the incentives and supervisory mechanisms of the external governance environment.The results show that: first,the external competitive environment and the external market environment can improve the efficiency level of commercial banks.Specifically,the higher the degree of external competition and marketization,the higher the efficiency of commercial banks,and the degree of government intervention in the regions where commercial banks are located.The lower the nonstate-owned economy and the higher the development of the factor market,the higher the operational efficiency of commercial banks.Further analysis also shows that the external competitive environment and marketization process improve the operational efficiency by reducing the agency cost of commercial banks.Therefore,the external competitive environment and the external market environment can play an incentive role for commercial banks.In addition,when analyzing the relationship between the external governance environment and the earnings management of commercial banks,we find that only media environment will affect the earnings management of commercial banks.Specifically,the higher the degree of media attention of commercial banks,the more restrained the behavior of commercial banks using loan loss preparation for earnings management.It is also found that different types of media and different media coverage time have different effects on earnings management of commercial banks.These studies show that media coverage has indeed played a role of public opinion supervision in the governance of commercial banks,and can improve the quality of earnings of commercial banks.The sixth chapter is a summary of the thesis and the prospects for future research.In addition,based on the conclusions of relevant studies,policy recommendations are discussed.The inadequacies of this thesis and potential improvements are also given.