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To cite this article: Mariarosaria Agostino , Leone Leonida & Francesco Trivieri (2005) Profits
persistence and ownership: evidence from the Italian banking sector, Applied Economics, 37:14,
1615-1621, DOI: 10.1080/00036840500214223
Fig. 1. Persistence of Protability: estimates are performed by means of a Gaussian Kernel and a Normal Bandwidth. Panel (a)
reports results for ROA; Panel (b) reports results for ROE
Profits persistence and ownership 1617
ROE and ROA between t and t s from 1997 to 2000 Dierent econometric techniques are used in
for a transitional period of four years (see next estimating these empirical models. However, the
section for data description). two-ways xed eects model appears to be the more
These estimates represent the probability of chang- appropriate estimation strategy: the poolability test
ing position in the ROA and ROE distributions rejects the null of equal intercepts across the sample
between t and t s. More specically, they measure and the Hausman test rejects the necessary ortho-
the probability of being in a certain position within gonality condition for the random eect model to
the distribution in t s, given the position of each hold (both tests are not reported). For this
observation at t. As in a more classical discrete tran- reason, in the following results based only on
sitional matrices approach, if the estimated mass lies this estimator are reported. After retrieving a^ i ,
about the 458 line, persistence is the main feature the role of potential determinants of such persistent
shown by the variables of interest. On the contrary, components is investigated. In particular, attention is
if the estimated mass is counterclock rotated with focused on ownership structure: it is asked whether
respect to the 458 line, prots are not persistent and to what extent ownership concentration
(Quah, 1997). and shareholder identity determine persistence in
The impression conveyed by the results is that protability.
persistence is the main feature across the sample The issue of the correlation between ownership and
of banks analysed. Indeed, all positions in the protability is far from being new in the corporate
conditional distribution tend to last at least four nance literature. Researchers have long been debat-
years. For both indexes, the probability mass lies ing on the relationship between ownership structure
about the main diagonal. Moreover, the two condi- and performance. Berle and Means (1932) claim that
tional distributions display rms located at both tails ownership concentration increases corporate value.
tending to gain position within the distribution, while This idea has been challenged by Demsetz (1983)
rms located at the centre tend to split in two and Demsetz and Lehn (1985) who, by taking
subsamples, each going toward the lower and upper into account the potential endogeneity of ownership,
tail respectively, and this suggest a certain tendency do not nd such a relationship. A large number of
to polarization of rms into two groups. Market subsequent empirical studies provide mixed evidence
forces might operate across the sample, even though about the relationship under question. As a
at very slow rate. general result, the following holds: earlier research
To summarize, not surprisingly protability tends to nd a signicant (non-linear) relationship
displays both persistence and volatility. Contrary to between ownership structure and performance
the main literature on bank protability, the interest (Morck et al., 1988). Recent studies, taking into
here is in the persistent component of ROE and account the endogeneity of some ownership charac-
ROA rather than in their time-varying fraction. teristics, reject the hypothesis of a signicant impact
Consequently, the dependent variables will be of ownership variables on rm protability (Loderer
the time-invariant components of bank prots, and Martin, 1997; Cho, 1998; Demsetz and
which are recovered by estimating a standard Villalonga, 2001).
model of prot determinants and calculating the By asking whether ownership structure deter-
following: mines persistence in prots, rather than their volati-
lity, the aforementioned literature, is substantially
X
5 departed from but its main caveat is still taken into
a^ i y i ^j x ji 1 account (i.e. the endogeneity issue) when the time
j1 invariant components of ROE (T.I.C-ROE) and
ROA (T.I.C-ROA) are regressed against ownership
where overbar variables refer to the time averages characteristics.
(Wooldridge, 2000). As a robustness exercise, both
ROE and ROA are used for y i . Following the rele-
vant literature (see, among others: Sapienza, 2000; III. Data and Empirical Results
Focarelli and Panetta, 2003), the vector x controls
for a measure of size (total assets and its squared A sample of 331 Italian banks for the period 1997
value), a measure of the operating eciency (opera- 2000 is used. In terms of total assets, the sample
tive costs/total assets), a measure of risk (bad loans/ represents more than 70% of the entire Italian bank-
total loans) and, nally, a measure of market power ing system. Moreover, all the institutional categories
(spread, calculated as dierence between the average of banks are represented: banks in form of cor-
return on loans and the average cost of deposits). porations, Popolari banks and Banche di Credito
1618 M. Agostino et al.
Cooperativo (BCC); the latter two categories zero standard deviation in the Herndahl index. Its
represent cooperative banks. relatively less stable component (Bank) displays a
The data come from two main sources. Balance- zero standard deviation 82% of the times; its stead-
sheet data are drawn from the BILBANK 2000 iest part (Families) presents a zero standard deviation
database provided by the Italian Banking in the 98% of the sample.
Association (ABI). On the other hand, information Given that four dierent measures of ownership
concerning the institutional features of banks (owner- structure are employed, four empirical models are
ship, geographic location and aliation to groups) estimated by OLS. All ownership characteristics are
is taken from a property rights allocation map. To always statistically signicant and their signs meet the
build this map several statistical sources are used: general intuition on the issue: the bigger the concen-
Il Sole 24 Ore (the most important Italian nan- tration and the fraction of shares controlled by banks
cial newspaper), the R&S database edited by and foundations, the higher the persistence in prots.
Mediobanca (the most important Italian investment The contrary holds for the market. However, the
bank) and CONSOB (the commission regulating the Hausman test for endogeneity is always signicant,
Italian Stock Exchange). rejecting the hypothesis that the necessary ortogonal-
The map gives a complete picture of the property ity conditions to identify the model are met. This
rights across the Italian banking sector in the last supports the hypothesis that ownership is endogen-
decade. During this period, the Italian banking indus- ous to prots. For this reason, the OLS results are
try has undergone a signicant institutional change not reported and a more ecient TSLS estimator is
as a consequence of a complex normative reform used. Results are shown in Table 1.
started at the beginning of the 1990s. The issuing of Following Demsetz and Villalonga (2001), a proxy
European directives in the banking eld, the enacting of size is used as instrument (log of total assets),
of the AmatoCarli law (legge 256/90) and the intro- which in the sample is strongly correlated with all
duction in 1993 of the TUB (Testo Unico in Materia the ownership variables. In the present case, other
Bancaria) are only some of the most important potential valid instruments such as market risk of
reforms that have greatly modied the national bank- stocks and rm-specic risk are ruled out because
ing regulation system. Within the context of the new the majority of banks in the sample are not quoted
legislative framework, two important processes on the Stock Exchange. All coecients are highly
played a crucial role in transforming the ownership signicant for both protability indicators, and the
structure of Italian banks: the selling-o of state pattern that found using OLS emerges again: coe-
held shares and the process of consolidation in cients for Concentration, Foundations and Banks
the national credit sector (for more details on display positive signs, whereas the estimated coe-
these privatization and consolidation processes see: cient for Market is negative.
Inzerillo and Messori, 2000; Messori 1998a, 1998b, As a robustness exercise, the results for the inu-
1999; Trivieri, 2004). An extract of the map, which ence that may be exerted on the time-invariant
is available from the authors upon request, is given in components of protability are controlled by some
the appendix. other potential sources of individual heterogeneity
As far as the variables employed in the empirical of banks. To this aim, the estimating models
analysis are concerned, following Demsetz and Lehn are extended by introducing the following control
(1985), ownership concentration is measured by variables: a territorial dummy (Location), coded
computing the average value of the Herndahl one if the bank has its registered oce in the centre-
index as follows: north of Italy and zero otherwise; a group dummy
(Group Aliation), distinguishing between banks
Herfindahl lnState2 Foundations2 Banks 2 which are aliated to groups and those which are
Families2 Other Legal Entities2 not and, nally, the spread as a measure of market
2 power. Results are reported in Table 2.
Both for ROA and ROE, all ownership variables
Foundations, Banks and Market are used also to keep their signs and statistical signicance. Moreover,
investigate the inuence of the owner identity on the magnitude of all coecients increases. While
the persistence of earnings. These variables and the spread is always insignicant, both location and
concentration index vary across banks and are group aliation display a signicant inuence on
relatively constant over time; for this reason they prots persistence. In particular, persistence is more
meet the condition of being potential determinants accentuated for northern than southern banks
of prots persistency (Berger et al., 2000). Indeed, and group aliation shows a negative eect on
almost all the banks of the sample (80%) display a persistence.
Profits persistence and ownership 1619
Table 1. Prots persistence and ownership structure
Notes: Estimates are performed by means of a TSLS estimator; in all regressions we use Size as instrument.
t-ratios are reported in parentheses; heteroscedasticity consistent t-ratios are reported in squared brackets. *** (**) [*] stands
for statistical signicance at the 1% (5%) [10%] level.
Table 2. Prots persistence and ownership structure: robustness to location, groups aliation and market power
Notes: Estimates are performed by means of a TSLS estimator; in all regressions we use Size as instrument.
Heteroscedasticity consistent t-ratios are reported in parentheses. *** (**) [*] stands for statistical signicance at the 1%
(5%) [10%] level.
As the eects of ownership may be conditional on average impact of ownership concentration, founda-
both location and especially group aliation, in each tions and banks is less pronounced. The same applies
regression the interaction terms between these vari- to aliated banks. On the other hand, consistently
ables and ownership characteristics are included. This with all previous results, both the interaction terms
allows whether the impact of ownership is signi- with the market variable display the opposite sign.
cantly dierent in the centre-north with respect to Since the coecient of market is negative, a positive
the south and for independent banks with respect interaction term coecient implies that the average
to aliated ones to be studied. impact of the market is less pronounced for bank
Table 3 shows that both interaction terms are whose headquarters are located in the north of the
highly signicant. In the centre-north of Italy, the country and for members of banking groups.
1620 M. Agostino et al.
Table 3. Prots persistence and ownership structure: interaction terms with location and groups aliation
Year
1997 2000
Bank Shareholder % Shareholder %
Cassa di Fondazione CDR Trieste 51.00 Unicredito Italiano 79.00
Risparmio di Holding Unicredito 28.00 Generali 5.00
Trieste Generali 5.00 Market 16.00
Market 16.00
Rolo Banca 1473 Credito Italiano 65.09 Unicredito Italiano 65.09
Fondazione Carimonte 3.96 Fondazione Carimonte 3.96
Ras 4.15 Ras 4.15
Market 26.08 Market 26.08
Banca Popolare Carisbo 47.00 B. Cardine 67.80
dellAdriatico H. Caer 5.00 Market 32.20
Market 48.00
Istituto Bancario C. di San Paolo 20.52 C. di San Paolo 16.16
San Paolo Torino IMI 5.00 Fondazione Cariplo 2.77
G. Agnelli & C. 5.00 Ente Carirenze 2.59
Banco di Santander 6.81 Banco Santander 7.03
Reale Mutua 3.00 MPS 6.17
MPS 3.00 G. Agnelli & C. 4.91
Kredietbank N. V. 2.00 Reale Mutua 3.00
Ente BNC 1.22
INA 1.00
HDI Hannover 1.00
Dexia 1.00