Does Government Ownership and Disclosure Affect Performance and Stability of the GCC Banking Sector?

Abstract

This paper studies empirically the effect of government ownership and the level of disclosure on the performance and the stability of banks, controlling for regulations, concentration, bank and country specific characteristics. The sample used covers 59 banks in six countries which comprise the Gulf Cooperative Council (GCC), for the period from 2004 to 2010. To test our hypotheses, two methodologies are implemented: The first is the Generalized Least Square Random Effect (GLS RE) methodology; and the second is the Generalized Method of Moment (GMM) methodology, which controls for the endogeneity and the omitted variable problems that occur in this kind of studies. Contrary to expectations, we find that governmentally owned banks are more stable than their counterparts. However, there is very limited evidence on the negative relationship between government ownership and bank performance. As documented in the literature, bank size is positively and significantly related to bank profitability and negatively related to risk taking. The level of disclosure negatively affect bank performance, indicating that investors may not view information disclosed by the bank as reliable or may not be able to interpret correctly the information disclosed.