IDEAS home Printed from https://ideas.repec.org/a/eee/chieco/v23y2012i2p284-295.html
   My bibliography  Save this article

Bank risk taking, efficiency, and law enforcement: Evidence from Chinese city commercial banks

Author

Listed:
  • Zhang, Jianhua
  • Wang, Peng
  • Qu, Baozhi

Abstract

We investigate bank risk taking, efficiency and their relation to law enforcement using a unique sample of 133 Chinese city commercial banks across 31 regions for the 1999–2008 period. We find that stronger law enforcement tends to promote greater bank risk taking in the region. Furthermore, employing a stochastic distance function approach, our analysis shows that the performance of Chinese city commercial banks, as measured by bank efficiency, is heavily influenced by the effectiveness of law enforcement in the region. Better legal environment, higher efficiency in the legal system, and stronger protection of intellectual property right are associated with a higher level of efficiency among these banks.

Suggested Citation

  • Zhang, Jianhua & Wang, Peng & Qu, Baozhi, 2012. "Bank risk taking, efficiency, and law enforcement: Evidence from Chinese city commercial banks," China Economic Review, Elsevier, vol. 23(2), pages 284-295.
    • Handle: RePEc:eee:chieco:v:23:y:2012:i:2:p:284-295
    DOI: 10.1016/j.chieco.2011.12.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1043951X11001386
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.chieco.2011.12.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Berger, Allen N. & Udell, Gregory F., 2006. "A more complete conceptual framework for SME finance," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2945-2966, November.
    2. Asli Demirgüč-Kunt & Luc Laeven & Ross Levine, 2004. "Regulations, market structure, institutions, and the cost of financial intermediation," Proceedings, Federal Reserve Bank of Cleveland, pages 593-626.
    3. Kose John & Lubomir Litov & Bernard Yeung, 2008. "Corporate Governance and Risk‐Taking," Journal of Finance, American Finance Association, vol. 63(4), pages 1679-1728, August.
    4. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    5. Ferri, Giovanni, 2009. "Are New Tigers supplanting Old Mammoths in China's banking system? Evidence from a sample of city commercial banks," Journal of Banking & Finance, Elsevier, vol. 33(1), pages 131-140, January.
    6. Berger, Allen N. & Clarke, George R.G. & Cull, Robert & Klapper, Leora & Udell, Gregory F., 2005. "Corporate governance and bank performance: A joint analysis of the static, selection, and dynamic effects of domestic, foreign, and state ownership," Journal of Banking & Finance, Elsevier, vol. 29(8-9), pages 2179-2221, August.
    7. Jun Qian & Philip E. Strahan, 2007. "How Laws and Institutions Shape Financial Contracts: The Case of Bank Loans," Journal of Finance, American Finance Association, vol. 62(6), pages 2803-2834, December.
    8. Luc Laeven & Christopher Woodruff, 2007. "The Quality of the Legal System, Firm Ownership, and Firm Size," The Review of Economics and Statistics, MIT Press, vol. 89(4), pages 601-614, November.
    9. Daron Acemoglu & Melissa Dell, 2010. "Productivity Differences between and within Countries," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 169-188, January.
    10. Demirgüç-Kunt, Asli & Huizinga, Harry, 2010. "Bank activity and funding strategies: The impact on risk and returns," Journal of Financial Economics, Elsevier, vol. 98(3), pages 626-650, December.
    11. Laeven, Luc & Levine, Ross, 2009. "Bank governance, regulation and risk taking," Journal of Financial Economics, Elsevier, vol. 93(2), pages 259-275, August.
    12. Hung-jen Wang & Peter Schmidt, 2002. "One-Step and Two-Step Estimation of the Effects of Exogenous Variables on Technical Efficiency Levels," Journal of Productivity Analysis, Springer, vol. 18(2), pages 129-144, September.
    13. Luis Orea, 2002. "Parametric Decomposition of a Generalized Malmquist Productivity Index," Journal of Productivity Analysis, Springer, vol. 18(1), pages 5-22, July.
    14. Ma, Yue & Qu, Baozhi & Zhang, Yifan, 2010. "Judicial quality, contract intensity and trade: Firm-level evidence from developing and transition countries," Journal of Comparative Economics, Elsevier, vol. 38(2), pages 146-159, June.
    15. Berger, Allen N. & Mester, Loretta J., 1997. "Inside the black box: What explains differences in the efficiencies of financial institutions?," Journal of Banking & Finance, Elsevier, vol. 21(7), pages 895-947, July.
    16. Fu, Xiaoqing (Maggie) & Heffernan, Shelagh, 2007. "Cost X-efficiency in China's banking sector," China Economic Review, Elsevier, vol. 18(1), pages 35-53.
    17. Wang, Qian & Wong, T.J. & Xia, Lijun, 2008. "State ownership, the institutional environment, and auditor choice: Evidence from China," Journal of Accounting and Economics, Elsevier, vol. 46(1), pages 112-134, September.
    18. Fries, Steven & Taci, Anita, 2005. "Cost efficiency of banks in transition: Evidence from 289 banks in 15 post-communist countries," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 55-81, January.
    19. Houston, Joel F. & Lin, Chen & Lin, Ping & Ma, Yue, 2010. "Creditor rights, information sharing, and bank risk taking," Journal of Financial Economics, Elsevier, vol. 96(3), pages 485-512, June.
    20. Jiang, Chunxia & Yao, Shujie & Zhang, Zongyi, 2009. "The effects of governance changes on bank efficiency in China: A stochastic distance function approach," China Economic Review, Elsevier, vol. 20(4), pages 717-731, December.
    21. Berger, Allen N. & Hasan, Iftekhar & Zhou, Mingming, 2009. "Bank ownership and efficiency in China: What will happen in the world's largest nation?," Journal of Banking & Finance, Elsevier, vol. 33(1), pages 113-130, January.
    22. Torsten Persson & Guido Tabellini, 2005. "The Economic Effects of Constitutions," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661926, April.
    23. Battese, G E & Coelli, T J, 1995. "A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data," Empirical Economics, Springer, vol. 20(2), pages 325-332.
    24. Daniel Berkowitz & Karen Clay, 2006. "The Effect of Judicial Independence on Courts: Evidence from the American States," The Journal of Legal Studies, University of Chicago Press, vol. 35(2), pages 399-440, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jianhua Zhang & Baozhi Qu & Zhong Xu & Peng Wang, 2012. "Market development and bank profit efficiency in China: application of the generalized Malmquist productivity index," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 19(2), pages 181-197.
    2. Dong, Yizhe & Girardone, Claudia & Kuo, Jing-Ming, 2017. "Governance, efficiency and risk taking in Chinese banking," The British Accounting Review, Elsevier, vol. 49(2), pages 211-229.
    3. Kalyvas, Antonios Nikolaos & Mamatzakis, Emmanuel, 2017. "Do creditor rights and information sharing affect the performance of foreign banks?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 50(C), pages 13-35.
    4. repec:zbw:bofrdp:2011_007 is not listed on IDEAS
    5. Fang, Yiwei & Hasan, Iftekhar & Marton, Katherin, 2014. "Institutional development and bank stability: Evidence from transition countries," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 160-176.
    6. Dong, Yizhe & Firth, Michael & Hou, Wenxuan & Yang, Weiwei, 2016. "Evaluating the performance of Chinese commercial banks: A comparative analysis of different types of banks," European Journal of Operational Research, Elsevier, vol. 252(1), pages 280-295.
    7. Fang, Yiwei & Hasan, Iftekhar & Marton, Katherin, 2011. "Market reforms, legal changes and bank risk-taking : evidence from transition economies," Research Discussion Papers 7/2011, Bank of Finland.
    8. Fang, Yiwei & Fornaro, James & Li, Lingxiang & Zhu, Yun, 2018. "The impact of accounting laws and standards on bank risks: Evidence from transition countries," Journal of Economics and Business, Elsevier, vol. 95(C), pages 103-118.
    9. Jiang, Chunxia & Yao, Shujie & Zhang, Zongyi, 2009. "The effects of governance changes on bank efficiency in China: A stochastic distance function approach," China Economic Review, Elsevier, vol. 20(4), pages 717-731, December.
    10. Dong, Yizhe & Meng, Chao & Firth, Michael & Hou, Wenxuan, 2014. "Ownership structure and risk-taking: Comparative evidence from private and state-controlled banks in China," International Review of Financial Analysis, Elsevier, vol. 36(C), pages 120-130.
    11. Kalyvas, Antonios Nikolaos & Mamatzakis, Emmanuel, 2014. "Does business regulation matter for banks in the European Union?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 278-324.
    12. Jiang, Chunxia & Yao, Shujie & Feng, Genfu, 2013. "Bank ownership, privatization, and performance: Evidence from a transition country," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3364-3372.
    13. Chunxia Jiang & Shujie Yao, 2010. "Banking Reform and Efficiency in China: 1995-2008," Discussion Papers 10/11, University of Nottingham, GEP.
    14. García-Kuhnert, Yamileh & Marchica, Maria-Teresa & Mura, Roberto, 2015. "Shareholder diversification and bank risk-taking," Journal of Financial Intermediation, Elsevier, vol. 24(4), pages 602-635.
    15. Agostino, Mariarosaria & Ruberto, Sabrina & Trivieri, Francesco, 2023. "The role of local institutions in cooperative banks’ efficiency. The case of Italy," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 84-103.
    16. Tabak, Benjamin M. & Fazio, Dimas M. & Cajueiro, Daniel O., 2013. "Systemically important banks and financial stability: The case of Latin America," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3855-3866.
    17. Shaban, Mohamed & James, Gregory A., 2018. "The effects of ownership change on bank performance and risk exposure: Evidence from indonesia," Journal of Banking & Finance, Elsevier, vol. 88(C), pages 483-497.
    18. Lin, Kun-Li & Doan, Anh Tuan & Doong, Shuh-Chyi, 2016. "Changes in ownership structure and bank efficiency in Asian developing countries: The role of financial freedom," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 19-34.
    19. Barros, Carlos Pestana & Williams, Jonathan, 2013. "The random parameters stochastic frontier cost function and the effectiveness of public policy: Evidence from bank restructuring in Mexico," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 98-108.
    20. Pasiouras, Fotios & Tanna, Sailesh & Zopounidis, Constantin, 2009. "The impact of banking regulations on banks' cost and profit efficiency: Cross-country evidence," International Review of Financial Analysis, Elsevier, vol. 18(5), pages 294-302, December.
    21. repec:zbw:bofitp:2015_022 is not listed on IDEAS
    22. Manlagnit, Maria Chelo V., 2015. "Basel regulations and banks’ efficiency: The case of the Philippines," Journal of Asian Economics, Elsevier, vol. 39(C), pages 72-85.

    More about this item

    Keywords

    Bank risk taking; Bank efficiency; Law enforcement; Stochastic frontier analysis; China;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K0 - Law and Economics - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:chieco:v:23:y:2012:i:2:p:284-295. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/chieco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.