The Impact of Election on Stock Market Returns of Government-Owned Banks: The Case of Indonesia, Malaysia and Thailand (original) (raw)

1. Introduction In the United States, banks have little or no government ownership (Shen & Lin, 2012; Andrianova, Demetriades, & Shortland, 2012). However, in emerging countries, especially Southeast Asian countries like Indonesia, Malaysia and Thailand, both private and government-owned banks co-exist but the latter is more common. In these countries, governmentowned banks are one of the drivers of economic policy because they provide loans and financial support to industries which are supported by the government. These industries are usually those not considered profitable enough to be given loans by private banks. Studies show that the high growth rate of Indonesia, Malaysia and Thailand in the mid-1990s, before the financial liberalisation (Booth, 2014) was mainly supported by local banks which were largely owned or controlled by local governments (Goldstein, 1998). In the decade preceding 19971998, a period that marks the Asian Financial Crisis (AFC), the financial markets of Indonesia, Malaysia and Thailand had grown rapidly. Table 1 shows that in 2012, the banking industry had contributed 17 per cent, 14 per cent and 5 per cent respectively to stock market capitalisation in Malaysia, Thailand and Indonesia. Government-owned banks in Indonesia and Malaysia accounted for 72 per cent and 71 per cent of the total listed bank capitalisation in their respective countries while in Thailand, the Thai government held 34 per cent of the country’s total bank capitalisation. These statistics show that government-owned banks have a large influence in steering the national economy of their countries. According to Sapienza (2004), there are three theories namely the social theory, political theory and agency theory which could explain the role of government ownership in banks. The social theory takes the Table 1: The Relative Size of Government-Owned Banks in Indonesia, Malaysia and Thailand view (Atkinson & Stiglitz, 1980) that government-owned banks help to reduce poverty, finance socially valuable (but financially unprofitable) projects, maintain the safety and soundness of the banking system, promote financial development, reduce income inequality (Beck, Demirgüç-Kunt, & Levine, 2007) and fund projects that help push for economic development (Dinc, 2005). The political theory suggests that government-owned banks act as a mechanism that is used by individual politicians to pursue their individual goals such as maximising employment or financing favoured enterprises (Shleifer & Vishny, 1994). The agency theory advocates that government-owned banks may be created to maximise social welfare and it may be exploited to generate corruption and misallocation (Banerjee, 1997; Hart, Shleifer, & Vishny, 1997). In Indonesia, during the Suharto regime, political connections act as a determinant in a firm’s access to finance (Borsuk, 1993; McBeth, 1994; Fisman, 2001). Many firms that were connected to Suharto preferred not to enter the international capital market as the benefits of international financing then were small compared to the benefits received from their local political connections (Leuz & Oberholzer-Gee, 2005). The Suharto regime was said to provide preferential financing for well-connected firms (so-called ‘‘memo-lending’’). For example, in the early 1990s, a lesser-known chemical and manufacturing group, Golden Key, had received an unsecured loan of USD430 million from the governmentowned bank, Bank Pembangunan Indonesia. It was subsequently disclosed that the youngest son of President Suharto, Hutomo Mandala Putra, was an early investor in Golden Key and it was he who had introduced the firm to bank officials who then approved the loan at ‘‘neck-breaking speed’’ (McBeth, 1994). In Malaysia, works done by Gomez and Jomo (1999) identify the existence of important relationships between politicians and firms. Using the list provided by Gomez and Jomo (1999), Johnson and Mitton (2003) find that politically-connected firms had poorer stock returns at the beginning of the Asian Financial Crisis (AFC). However, as soon as capital controls were implemented by the government, politicallyconnected firms did better on average, proving that the implementation of capital market greatly benefitted the connected firms. In Thailand, ten families control about half of the corporate assets in the country (Claessens, Djankov, & Lang, 1999). These families remained dominant in the industry as a result of the advantages they had obtained from the government. They held monopoly power in the local market; they held special exporting or importing rights; they would win hefty government contracts and they were also protected from foreign competition. It appears that cronyism, unlikely to be a minor influential factor, contributed to the AFC in Thailand. Cronyism, in Claessens et al.’s (1999) term, has been a permanent feature of Thailand in the last few decades. As mentioned by Nys, Tarazi, and Trinugroho (2015, p. 83), “while political connections of non-financial firms are well-documented in literature, the impact of political connections on banks is less studied”. This gap paves the need to further explore the subject of political connections and banks. To the best of the researchers’ knowledge, past literatures investigating the role of politicians in the banking industry focused on comparing profitability (Molyneux & Thornton, 1992), lending behaviour (Dinc, 2005) and risk-taking (Braun & Raddatz, 2010) patterns of government-owned banks with other banks. (For ease of reference, non government-owned banks are referred to as “private banks” in this paper.) According to Shen and Lin (2012), political influence in the banking industry is highly relevant during election years and election is often used as the proxy for political influence in firms (Brown & Dinc, 2005; Dinc, 2005; Khwaja & Mian, 2005; Leuz & Oberholzer-Gee, 2005). Elections, in particular, might tempt politicians who are in control to use government-owned banks for political purposes (Dinc, 2005). This might cause government-owned banks to behave differently around election periods unlike private banks with no such connections. While past studies usually use regression analysis to measure the effect of political connection on banks in a long horizon, their effect in the short-horizon has not been well-researched. To fill in this gap, this study uses the event study methodology to investigate the variation between the cumulative average abnormal returns (CAAR) of government-owned banks and private banks during election periods in three countries: Indonesia, Malaysia and Thailand. The organisation of this paper is arranged as follows. Section 2 presents the literature review. Section 3 explains the data and methodology. Section 4 provides the descriptive statistics. Section 5 reports and discusses the empirical results. Section 6 is the conclusion.