Flujo de la información

Table 7.2 below provides the results of the regression model (3.8) showing that there is a negative and very significant effect between the efficiency score and all explanatory variables. The negative effect is due to the nature of the efficiency score and should be translated as a positive effect because a lower value of efficiency score, means a higher efficiency cost.

Table 7.2: Other factors estimation

Variables Equation using Tobit estimate Equation using GLS estimate

For -0.3188 (0.2169)*** -0.1453 (0.0395)***

For*Assets 6.05e-07 (7.58e-08)*** 2.17e-07 (7.26e-08)***

Assets 6.52e-08 (3.99e-08)* -5.79e-08 (2.48e-08)**

CustomDep 0.2050 (0.0385)*** -0.0503 (0.0206)**

Linvass -0.0023 (0.0023) -0.0065 (0.0017)***

Constant 0.7151 (0.02148)*** 0.8958 (0.02927)***

Source: Banks’ annual report and author calculations

Notes: Dependent variable is the cost efficiency score in percentage. Coefficient beta is reported and standard error is in parentheses.

(***) Significant at 1%, (**) Significant at 5%, (*) Significant at 15%. N:14 banks

The main lesson from the results is that the coefficient for foreign ownership For is highly significant and positive at 1% level in both regressions, suggesting that in the SA market foreign-owned banks have a significant advantage in cost efficiency relative to domestic-owned banks. In addition, as the regressions control for the influence of size and structure of activities (variables Assets and Linvass) and for risk preferences of managers (Equity) included in the estimation of efficiency scores, results confirm that foreign-owned banks benefit from better management.

Secondly, the interaction variable For*Assets, which is highly significant at 1% level in both regressions, proves that the efficiency gap between domestic and foreign- owned banks is a result of the banks’ size. It shows that the correlation between the variables For and Assets, which is the result of a larger size for domestic-owned

that the link between foreign ownership and cost efficiency is the direct result of the smaller size of the foreign-owned bank.

In addition this advantage for foreign banks could be explained by both better control by the foreign shareholder and a comparative advantage in banking know-how, which is provided by their mother companies. The latter explanation is even more plausible as all the foreign banks in the sample operate in the small segment of investment banking that requires particular knowledge and techniques. However, the foreign- owned banks’ management, who have greater managerial experience in a market economy than domestic-owned banks’ in developing countries, may suffer from poorer information about the domestic market and have less information on the quality of borrowers. In addition, foreign-owned banks’ management may be less familiar with moral hazard problems8 in emerging or developing economies, where the market is less committed to western standards of contract rules (unreliable accounting information and consequently equity and collateral values that are not properly assessed). The results show that this is not the case here. The foreign-owned banks do not have weaker knowledge of domestic customers and this is confirmed by the fact that from at least 1994 when the foreign banks returned to the SA market, they have had time to adjust and understand the local market. It is helpful to remember that some foreign-owned banks have never left the SA market after the establishment of the Apartheid regime (for instance in the case of the Bank of Athens).

The coefficient of CustumDep is significant in both regressions suggesting that

deposits may imply lower costs than other financing sources. But with opposite signs for each coefficient from both regressions, it is difficult to provide a clear explanation. However, it is important to remember that the big names of foreign investment banks that have easier access to cheaper international financing sources are not represented in the panel as they operate as foreign branches, whose data from financial reports are

8 _{Banks collect deposits and invest these funds in risky assets (loans). To safeguard against insolvency,}

banks hold capital buffers against adverse outcomes in their investments in risky assets (loan default). But the bank’s private solvency target may not take into account the interests of depositors, nor of society as a whole. As a result, banks may engage in excessive risk-taking (Nier and Baumann, 2006).

not accessible. On the other hand, Linvass is significant in only one regression making it even harder to conclude.

The coefficient of size (Assets) is significant at the 10% and 5% levels respectively in Tobit and GLS estimates. This confirms that there is a linear relationship between size and cost efficiency for SA banks as mentioned earlier. This particular observation could be linked to the issue of economies of scale suggesting that potential economies of scale may be achieved in the SA banking sector; but this is beyond the scope of this study and will not be developed further.

This section shows that in the SA banking sector, foreign ownership is strongly associated with higher cost efficiency. A higher level of cost efficiency remains, even when adding variables such as size and structure of activities into the regressions. This represents another piece of new evidence about a developing economy that can be added to the existing literature; Claessens et al. (1998), Micco et al (2004), Berger et al. (2005) find that in developing countries foreign banks tend to have higher profits, better performance and lower costs than domestic and state-owned banks. The same literature concludes that domestic-owned banks have better knowledge of the local market. However, this study shows not only that foreign banks perform better but also that they possess as good quality information about the local market as domestic-owned banks and better know-how.

This study could suffer from some particular limitations such as the small segment in which the foreign-owned banks operate, their size in term of assets and their number in the sample (5 foreign-owned banks for 9 domestic-owned banks: almost a ratio of 1:2). Unfortunately, it was not possible to include in the panel the data from the foreign branches’ annual reports, as these data were not accessible. And this the reason why the survey on foreign banks where designed and presented in chapter 2.