Impact of ownership structure on default risk: A case of banking sector of Pakistan

Abstract

This study empirically investigates the impact of ownership structure on default risk of banks by using the panel data of commercial banks of Pakistan over the period of 2005-2011. The study considers two dimensions of ownership structure: categories of owners and ownership concentration. The study further splits the categories of owners into seven categories (managers/directors, families/individuals, foreigners, public owners, banks, non-banking financial institutions, and non-financial institutions), having different risk taking incentives. Controlling for various factors, the results of the study reveal that the ownership structure is significantly related with default risk of banks. On the whole, higher equity stake families/individuals are associated with a decrease in default risk of banks. Also, the involvement of public owners and foreign owners in ownership structure seem to increase the default risk of banks. All other categories do not have significant relation with default risk of banks. Finally, the findings of the study suggest that high ownership concentration is associated with high default risk in banks.