The impact of minority foreign ownership and controlling shareholder on bank risk and performance Evidence from an emerging economy

Purpose - The purpose of this paper is to examine the impact of minority foreign ownership on the risk taking behavior and performance of domestic banks in a country where foreign ownership restrictions are imposed. Design/methodology/approach - Mainly controlled by family business groups, the authors examine the extent by which the presence and the level of foreign ownership and voting rights affect domestic bank behavior. Findings - The results show that compared with those purely domestic-owned, banks with foreign shareholdings have lower levels of insider lending and have higher loan portfolio quality. Moreover, the authors find an increase in foreign voting rights effective in raising risk-adjusted returns and in lowering default risk. This positive effect on performance, however, ceases at higher levels of control manifested by the majority domestic shareholder. Research limitations/implications - Overall, this study shows that there are significant benefits derived from minority foreign shareholder presence in Philippine domestic banks. Originality/value - This paper contributes to the debate of whether it may be beneficial to reduce or completely lift the foreign ownership restrictions imposed on the banks in the country.