Ownership structure and bank performance: the impact of market competition

This paper investigates whether and how ownership concentration, as an intearnal mechanism of corporate governance, and market competition, as an external mechanism of corporate governance, interact to influence bank performance. In other words, we test whether ownership concentration and competition are complementary or substitutes. To do so, we use a unique hand-collected database covering commercial banks based in 17 Western European countries from 2006 to 2019. Consistent with previous studies, we find that ownership concentration and market concentration increase the profitability and risk-taking behaviour of banks. Furthermore, no evidence of non-linearity of competition is found for our sample of European banks. Regarding the interaction effect, our results indicate that market competition seems to foster the profitability of banks with concentrated ownership. In addition, we find that risk-taking behaviour of banks with controlling shareholders increases when they operate in competitive markets. These results suggest that ownership concentration and market competition are complementary, and hence banks may benefit differently from these corporate governance mechanisms to improve their performance.