Activity-based diversification, corporate governance, and the market valuation of commercial banks in the Gulf Commercia
- PDF / 308,513 Bytes
- 30 Pages / 439.37 x 666.142 pts Page_size
- 15 Downloads / 190 Views
Activity-based diversification, corporate governance, and the market valuation of commercial banks in the Gulf Commercial Council Salim Chahine
Published online: 21 November 2007 Springer Science+Business Media, LLC. 2007
Abstract This article examines the effect on market valuation of both corporate governance and the diversity of activities conducted by GCC commercial banks. It shows evidence on the endogenous effect of corporate governance and the characteristics of the banking industry in determining the diversification level of a bank. Empirical findings show a bias in results using ordinary least squares regressions. When controlled for endogeneity, they indicate a negative (but weak) association between the diversification index and the market valuation—consistent with the agency-based hypothesis. Interestingly, foreign banks and corporate shareholders are effective monitors who invest in more diversified GCC banks with higher valuation multiples. Conversely, domestic corporate shareholders—related by a complex web of relationships—invest in less diversified banks with a lower market valuation. In addition, diversified commercial banks with either subsidiaries in developed countries or involvement in market-based activities have higher market valuation. The latter may be explained by the effect on performance of the recent bubble in the Arab stock market. Keywords Corporate governance Diversification GCC commercial banks Market valuation Ownership structure
1 Introduction As Saudi Arabia remains flush from booming oil prices, and opens its banking sector up to competition, the kingdom’s institutions are making aggressive plays for the consumer market and other new business. S. Chahine (&) The Suliman Olayan School of Business, American University of Beirut, 11-236, Beirut, Lebanon e-mail: [email protected]
123
354
S. Chahine
Oil Wealth Offers New Opportunity, by James Gavin, Jon Marks and Paul Melly, The Banker, 02 August 2004 Due to the recent boom in the oil market, commercial banks in the Gulf Cooperation Council (GCC), i.e., Saudi Arabia, Kuwait, Bahrain, Oman, Qatar, and the United Arab Emirates, benefited from an increase in deposits by both individuals and corporations looking for more sophisticated products and services. GCC banks therefore face a dilemma between increasing uncertainty related to expanding into new services, or maintaining traditional offers and risking a loss of potential market share. Diversification has thus become a crucial factor affecting the growth opportunities and the valuation of GCC banks. Theoretically, there are two conflicting effects of diversification on the valuation of commercial banks. From a resource-based perspective, diversification may be a valuable resource which offers banks a competitive advantage that is costly or difficult to obtain by other banks (Barney 1991). Diversifying activities may allow commercial banks to acquire more information about their clients and have better lending relationships which thereby improve efficiency (Pet
Data Loading...
