Ownership structure and bank risk-taking: the case of Vietnam

International Journal of Management
Volume 11, Issue 03, March 2020, pp. 427-434. Article ID: IJM_11_03_045
Available online at />Journal Impact Factor (2020): 10.1471 (Calculated by GISI) www.jifactor.com
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OWNERSHIP STRUCTURE AND BANK RISKTAKING: THE CASE OF VIETNAM
*Long Hau LE
College of Economics, Can Tho University, Vietnam
(Postal Address: College of Economics, Can Tho University, Campus II, 3/2 street, Ninh Kieu
district, Can Tho city, 900000, Vietnam).
Thanh Hoang PHAM
College of Economics, Can Tho University, Vietnam
Tan Nghiem LE
College of Economics, Can Tho University, Vietnam
*Corresponding Author
ABSTRACT
This study is to analyze the impact of ownership concentration and of various types
of shareholders on the risk-taking behavior of Vietnamese joint-stock commercial banks
using a panel data of the period 2010-2017. In line with the literature, results from a
panel regression with fixed effects show that as the ownership concentration increases,
the risk-taking behavior of the bank also increases. With regard to the impact of various
types of shareholders, the results show that the institutional and foreign shareholders
ownership can reduce the bank risk-taking behavior. CEO and individual shareholder
ownership also seem to have a negative impact on the bank risk-taking behavior,
however the statistical test does not support for this relation. Findings from this study
are supported by the real situation of the Vietnamese economy. From these results, a
number of policy recommendations are put forward.
Keywords: Bank shareholders, Risk-taking behavior, Ownership concentration,

Vietnam.
JEL Classifications: G21; G38; G18
Cite this Article: Long Hau LE, Thanh Hoang PHAM and Tan Nghiem LE, Ownership
Structure and Bank Risk-Taking: The Case of Vietnam, International Journal of
Management, 11 (3), 2020, pp. 427-434.
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1. INTRODUCTION
In an economy, the banking system plays a very important role in transferring capital to the
economy. A healthy banking system will contribute to the economic development and vice
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Long Hau LE, Thanh Hoang PHAM and Tan Nghiem LE

versa, the weak banking system will adversely affect the whole economy. For example, the
consequences of the weakened banking system were verified by the Asian financial crisis in
1997, or by the world economic crisis in 2007 and 2008 followed by the bankruptcy of
corporations and major banks. The causes of the recession and crisis are given as the mutual
lending in corporations whose branches are banks, or as the increasing cross-ownership of
banks, etc. Considering these facts, it is important to consider the impact of ownership structure
on the efficiency of the banking system. This is because the ownership structure of a bank may
have influences on its risk profile, since it determines whether managers have the appropriate
power and authority to make the right decisions on the businesses. Stemming from the
importance of this issue, a large number of empirical studies have been conducted, focusing on
the two aspects of the ownership structure, i.e. the impact of a concentrated and dispersed
ownership structure on the risk-taking behavior of the banking system (e.g., Bouwens and
Verriest (2014), Srairi (2013), Barry et al. (2011), Laeven and Levine ( 2009), Bolton et al.

(2011), Houston et al (2010), etc.).
The Vietnamese banking system with majority of small banks can be characterized as being
very much volatile and high risk of insolvency. Recently, banks have been quickly increasing
their charter capital, especially after the Decree No. 141/2006/ND-CP of the government
stipulating the minimum legal capital of commercial banks up to VND 3,000 billion. The rapid
increase of capital of banks in the system within a short time has led to the cross and multilateral
ownership structure between either banks and corporations or banks and banks. These problems
generate a lot of bad debts, especially systematic risks due to liquidity problems. Thus, an
analysis of the impact of ownership structure of the bank on its risk profile becomes significant,
especially at this stage of the restructuring of the banking system in Vietnam. Up to my
knowledge, such a study has not yet been implemented. This research aims at filling this gap of
the literature.
The structure of the paper is organized as follows. Section 2 reviews the literature on the
impact of ownership structure on bank risk-taking behavior. The research methodology is
described in section 3, followed by data in section 4. Section 5 presents the empirical results.
Finally, we provide some concluding remarks and policy recommendations in section 6.

2. LITERATURE REVIEW
Numerous theoretical and empirical attempts have been conducted to analyze the determinants
of bank risk taking. Agency theory by Jensen and Meckling (1976) postulates that conflicts
between managers and shareholders induce risk taking behavior. According to the theory,
managers have less incentive to take high risk since they like to protect their position and
personal benefits, meanwhile that is not the case for shareholders with a diversified portfolio
after collecting funds bondholders and depositors (Esty, 1998; Galai and Masulis, 1976). This
agency problem in firms, nevertheless may be alleviated with concentrated ownership structure,
since managers are strictly monitored and even replaced by controlling shareholders in the case
of poor performance (Franks, Mayer, and Renneboog, 2001). Therefore, firms with
concentrated ownership are expected to take more risk than those with dispersed ownership
structure.
Grounded on this theoretical background, a number of empirical studies on the topic have

been implemented. Some studies such as Laeven and Levine (2009); Haw, Ho, Hu, and Wu
(2010), show supporting evidence for the theory that banks with more powerful owners (i.e.
concentrated ownership control) tend to take greater risks. Inversely, other studies reveal a
negative association between ownership concentration and risk, contradicting to the theory.
E.g., Srairi (2013) for the Middle East and North Africa; Shehzad, De Haan, and Scholtens
(2010) for 50 countries averaged over 2005–2007. Furthermore, examining the relation between

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Ownership Structure and Bank Risk-Taking: The Case of Vietnam

managerial ownership and bank risk, Saunders et al. (1990); Bouwens and Verriest (2014) show
that shareholder-controlled banks tend to take more risk than those with managerial ownership.
The reason is that shareholders have diverse portfolios, motivating to be more risky to achieve
higher expected returns, while managers have less incentive to take risk as they protect their
personal position and interests. For examples, Saunders et al. (1990), Bouwens and Verriest
(2014) show a negative relationship between CEO ownership and bank risk.
Also, the type of shareholders could influence the risk-taking behavior of banks. As shown
by Srairi (2013) and Barry et al. (2011), banks owned by individual shareholders are most likely
to have less diversified portfolios, hence they tend to take less risk to ensure their survival at
the long term. Moreover, these banks often have smaller portfolios, leading to a lower risk
(Anderson et al., 2003).
Concerning the impact of foreign ownership on the bank risk, Lee (2008) finds a negative
association between the percentage of shares held by the foreigners and the risk of the Korean
banking system. This negative relation is explained by the fact that foreign investors often
invest in stable and high liquid cash flows. In addition, institutional shareholders may also shape

the nature of corporate risk taking, since they are more expertise in processing information
and monitoring managers. On the one hand, due to the economies of scale in corporate
supervision, institutional shareholders can exert greater control on managers. On the other hand,
given the diversified portfolio of investments, institutional shareholders may have lower
incentives to exercise control. Empirical evidence finds inconclusive evidence on the effect of
control by institutional investors on firm value (Srairi, 2013; Barry et al., 2011). Finally,
incentives to risk taking are also influenced by the characteristics of banks comprising of bank
size and liquidity (Caprio, Laeven, and Levine, 2007; Paligorova, 2010) and economic
conditions such as economic growth and inflation (La Porta et al., 1998; La Porta, Florencio,
Andrei, and Robert, 2002; Bouwens and Verriest, 2014; Srairi, 2013).

3. RESEARCH METHODOLOGY
Following the literature (see e.g., Bouwens and Verriest (2014); Laeven and Levine (2009)),
the empirical model to investigate the impact of ownership concentration on bank risk is
presented as follows:
Yit = α + β1CONCit + β2SIZEit + β3ROAit + β4LDRit + β5GGDPit + β6CPIit + εit

(1)

where, α is constant; βs is the estimated coefficients; i is individual bank, t denotes time;
CONC symbolizes ownership concentration; SIZE represents for firm size; ROA is returns on
assets; LDR denotes liquidity ratio; GGDP is economic growth rates; CPI displays inflation rates;
𝜀𝑖𝑡: random errors.
Dependent variable (Y) is Z-score, measured by the summation of ROA and CAR (capital
adequate ratio) divided by standard deviation of ROA. This variable reflects for the degree of
bank risk, where a higher Z-score indicates that the bank has a lower risk. Expressing in the
formula form: Z-score = (ROA + CAR)/σROA
Definition of all independent variables is as follows: CONC is defined as the percentage of
shareholdings by the largest shareholder in a bank; SIZE is measured by the natural logarithm
of total assets; LDR is the ratio of total outstanding loans divided by total deposits; ROA is

calculated by the ratio of after-tax profits divided by total assets; GGDP is growth rate of gross
domestic product and IR is annual inflation rates.
As with several previous studies (e.g., Saunders et al. (1990); Srairi (2013); Barry et al.
(2011)), the impact of different types of ownership on the bank risk is also examined using the
equation (2):

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Long Hau LE, Thanh Hoang PHAM and Tan Nghiem LE
Yit = α + β1CEOit + β2INDIit + β3COMPANYit + β4FOREIGNit + β5SIZEit + β6ROAit+ β7LDRit +
β8GGDPit + β9CPIit + εit
(2)

where, all notations are the same as in equation (1); CEO symbolizes shareholdings of CEO;
INDI represents for individual shareholdings; COMPANY denotes institutional shareholdings;
FOREIGN symbolizes foreign shareholdings; ROA is returns on assets; LDR denotes liquidity
ratio; GGDP is economic growth rates; CPI displays inflation rates; 𝜀𝑖𝑡: random errors.
In equation (2), while SIZE, ROA, LDR, GGDP and CPI are measured as in equation (1),
the other variables are defined as follows: CEO is measured by the percentage of shares owned
by CEO; INDI is the total percentage of shares owned by all individual shareholders;
COMPANY is calculated by taking the total percentage of shares owned by all institutional
shareholders and FOREIGN is the total percentage of shares owned by all foreign shareholders.
Regression model with panel data is estimated by both the fixed effects method (FEM) and
random effects method (REM), and the appropriate method is selected using Hausman test.
Multicollinearity of the regression is tested by VIF (Variance Inflation Factor). In addition, the
tests related to the reliability of the regression model are also appropriately carried out.

4. DATA
Data are collected from the annual audited financial reports of 26 Vietnamese Joint Stock
Commercial Banks during 2010 – 2017. The number of banks in the sample only accounts for
about 83.87% of the bank population in Vietnam at the end of 2017 due to the data availability.
Macro economic variables are collected from the General Statistics Office of Vietnam (GSO).

5. EMPIRICAL RESULTS
5.1. Descriptive Statistics and Correlation Analysis
Descriptive statistics for all variables are presented in TABLE 1. As can be seen from the table,
the average shareholding of the largest shareholder (CONC) is approximately 24%. The CEO
of banks holds on average about 0.52% of total bank shares. While the average shareholding of
individual shareholders is approximately 42%, that of institutional shareholders is about 54%.
For foreign shareholders, the average ownership accounts for about 11%.
Table 1 Descriptive Statistics of All Variables

Variable
Unit
Mean
Std.
Min
Max
CONC
%
23.96
24.31
4.08
100,00
CEO
%

0.52
1.49
0.00
6.99
INDI
%
42.21
27.11
0.00
97.45
FOREIGN
%
10.72
11.82
0.00
30,00
COMPANY
%
53,72
27.50
0.00
100,00
ASSETS
VND Bil.
167,433
210,331
12,627
1,202,283
ROA
%

0.80
0.83
-5.99
5.54
LDR
%
61.50
16.03
16.73
99.45
GGDP
%
6.13
0.52
5.25
6.81
CPI
%
6.81
5.30
0.63
18.58
TABLE 2 shows the correlation coefficients between independent variables in the
regression model. In general, all the correlation coefficients between independent variables in
both equation (1) and (2) have absolute values less than 0.8, indicating that multicollinearity is
not a serious problem affecting the estimation results of the model (Gujarati, 2004).

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Ownership Structure and Bank Risk-Taking: The Case of Vietnam
Table 2 Correlation Matrix of Variables
Variable

CONC

CEO

INDI

COMPANY

CONC
CEO
INDI
COMPANY
FOREIGN
SIZE
ROA
LDR
GGDP

1.00

0.53
0.07
0.38

-0.03

1.00
0.44
-0.40
-0.21
-0,16
-0.15
0.04
-0.04

1.00
-0.81
-0.18
-0.47
-0.20
-0.20
-0.01

1.00
0.18
0.53
0.24
0.17
0.01

CPI

0.07

-0.09

-0.13

0.08

FOREI
GN

SIZE

ROA

LDR

GGDP

1.00
0.34
-0.03
0.06
0.09

1.00
-0.08
0.19
0.12

1.00
0.12

0.12

1.00
0.11

1.00

-0.11

-0.19

0.39

-0.15

-0.28

CPI

1.0
0

5.2. Regression Results and Discussions
The estimation results from equation (1) and (2) are presented in TABLE 3. Using the Hausman
test to choose between FEM and REM, the results show that the FEM model is more
appropriate. Therefore, the two equations are estimated by FEM. Besides, the Wald statistics
for a groupwise heteroskedasticity diagnostics test are highly statistically significant at the one
percent level, indicating that significant heteroskedasticity across banks is present. In addition,
the Wooldridge test for autocorrelation also shows that the first order autocorrelation over time
exists. Hence, the regression model is estimated by taking into account this heteroskedasticity

and autocorrelation, that is, using cluster-robust standard errors, clustering by the panel
variable.
As can be seen from the table, in equation (1) three independent variables, i.e. ownership
concentration (CONC), bank size (SIZE) and liquidity (LDR), are statistical significance at the
level of 1% to 5%, meanwhile the other variables are not statistically at traditional levels.
Noticeably, the variable of ownership concentration (CONC) is negatively significant at the 5%
level, indicating that the ownership concentration is negatively related to Z-score of the bank.
This means that the larger ownership the shareholder has the greater the risk of the bank takes,
and vice versa. These results are consistent with previous studies (Bouwens and Verriest, 2014;
Laeven and Levine, 2009). These results could be explained by the fact that the shareholders
with a majority stake have the dominant rights to vote on the bank governance structure, thus
they may direct bank managers to invest in high risk projects to maximize their profits. These
findings are, in fact, supported by the real situation of Vietnam. Particularly, over last year some
banks mainly controlled by one or a few shareholders were put under a strict supervision by the
State Bank of Vietnam due to the high rate of non-performing loans and illiquidity. An example
of this is the case of two joint-stock commercial banks, i.e. Construction Bank (CB) and Asian
Commercial Banks (ACB).
Regarding the equation (2), four independent variables are statistical significance at the 5%
to 10% levels, i.e. Institutional shareholder ownership (COMPANY), foreign shareholder
ownership (FOREIGN), bank size (SIZE) and liquidity LDR), while all the other variables are
not statistically significant at the traditional levels. It can be seen from the results that the
variable of COMPANY is positively correlated with Z-score at the 5% significance level,
showing that the institutional shareholder ownership has a positive impact on the bank risk.
More specifically, as the ownership of institutional shareholder increases, the risk of the bank
decreases, and vice versa. These results are in line with the arguments put forward by previous
studies (Srairi (2013); Barry et al. (2011)). As for the foreign shareholder ownership variable

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Long Hau LE, Thanh Hoang PHAM and Tan Nghiem LE

(FOREIGN), the estimated coefficient is positively significant at the 5% level. This result
shows a positive association between foreign shareholder ownership and the bank’s Z-score,
implying that the greater foreign shareholder ownership the bank has, the lower the risk the
bank takes, and vice versa. Again, these findings are in line with the previous studies such as
Lee (2008). In fact, the importance of foreign shareholder ownership for the Vietnamese banks
can be seen through the fact that the last period has witnessed a strong wave of seeking for
strategic foreign partners by banks as a way among others to improve their risk management
capacity. Interestingly, the estimated coefficient of CEO ownership (CEO) and individual
shareholder ownership (INDI) is positive as predicted by previous studies (Saunders et al.,
1990; Bouwens and Verriest, 2014; Srairi, 2013; Barry et al., 2011), although not being
statistically significant at the traditional levels.
Table 3 Regression Results of Equation (1) and (2)
(1)
-0,664**
(0,254)

CONC

(2)

0.045
(0.576)
0.072**
COMPANY
(0.036)

0.014
INDI
(0.026)
0.210**
FOREIGN
(0.008)
-9,185***
-4,806*
SIZE
(2,522)
(2,543)
0.567
0.319
ROA
(1,729)
(1,041)
0.199***
0.113*
LDR
(0.059)
(0,744)
0.059
-0,686
GGDP
(1,469)
(1,256)
0.077
-0,055
CPI
(0.1138)

(0,165)
333,825***
178,672**
Constant
(81,781)
(78,747)
N
169
130
2
R
0.332
0.226
F-test
4.42***
23.27***
16.69**
11.34**
Hausman test (2)
6583.40***
523.60***
Wald test for heteroscedasticity (2)
Wooldridge test for autocorrelation (F)
23.37***
9.77***
Notes: the notations *, ** and *** denote the significance levels of 10%, 5% and 1%,
respectively; standard errors are robust standard errors after correcting for heteroskedasticity
shown in parentheses.
CEO

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Ownership Structure and Bank Risk-Taking: The Case of Vietnam

Taking a look at the control variables, bank size and liquidity are consistently statistically
significant at the 1% to 10% levels for both equation (1) and (2), meanwhile the others are not
statistically significant at any traditional levels.

6. CONCLUSION AND POLICY RECOMMENDATIONS
Grounded on the agency theory, the economic literature predicts that conflicts between
shareholders and managers may influence the risk-taking behavior of commercial banks. This
study investigates the impact of ownership concentration and of various types of shareholders
on the risk-taking behavior of Vietnamese joint-stock commercial banks using a panel data of
the period 2010-2017. In line with the literature, results from a panel regression with fixed
effects show that as the ownership concentration increases, the risk-taking behavior of the bank
also increases. With regard to the impact of various types of shareholders, the results show that
the institutional and foreign shareholders ownership can reduce the bank risk-taking behavior.
CEO and individual ownership also seem to have a negative impact on the bank risk-taking
behavior, however the statistical test does not support for this relation. These findings are
consistent with the real situation of Vietnamese economy.
From these results, a number of policy recommendations are put forward. For policy makers
and regulators of the banking system, since the ownership concentration may have positive
impact on the risk-taking behavior of the bank, restrictions on shareholdings should be imposed
to reduce the ownership concentration in banks. Additionally, given that the institutional and
foreign shareholders can alleviate the bank risk-taking behavior, legal frameworks to encourage
their investment in the banking systems with a moderate restriction on shareholdings may help.

For commercial banks, they should be open to institutional and foreign shareholders as a way
to improve their risk management capacity. In order to do attract more institutional and foreign
investors, commercial banks should be more transparency and effective in their businesses.

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