This study investigates the effects of ownership change on the performance and exposure to risk of 60 Indonesian commercial banks over the period 2005-2012. We find that state-owned banks tend to be less profitable and more exposed to risk than private and foreign banks. Domestic investors tend to select the best performers for acquisition. Domestic acquisition is generally associated with a decrease in the efficiency of the acquired banks. Non-regional foreign acquisition is associated with a reduction in risk exposure. Acquisition by regional foreign investors is associated with performance gains.
The paper shows that politically motivated interventions in the financial market in the form of bailing out borrowing firms reduce banks' incentives to gather valuable information about firms' projects. This loss of information is a hidden cost which adversely affects firm value. Firms invest resources and pay a premium to politically connected persons (BOD or other personnel). Such connections serve the twin purposes of hedging and enhancement of the value of collateral pledged against bank loans. Feeling secured, banks lose incentives to monitor borrowing firms. Thus, wealth effect of bailout from political connection is partially offset by the losses of valuable information brought about by bank lending. In equilibrium, the trade-off from gains out of political connections and costs due to losses from informationbased bank monitoring depend on (i) the country's disclosure laws, (ii) the political environment, (iii) the premium paid to form connections, and (iv) the state of the economy.
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