The purpose of this paper is to investigate the relationship between the quality of property rights institutions (PRIs) and bank financial performance in an empirical study of 136 countries over the period 1999-2006.
The quality of PRIs and financial accounting-based measures of bank performance are obtained from the Economic Freedom of the World Project (Gwartney et al., 2006), the Polity IV Project, the World Bank data indicators database, and the International Monetary Fund. Several multiple regression analyses are conducted to test the study hypotheses.
The results reveal that the quality of legal structure and security of PRIs positively (negatively) affects both bank cost efficiency (inefficiency) and profitability. The presence of a quality political structure negatively (positively) affects bank cost efficiency (inefficiency). The quality of political structure has no direct impact on bank profitability. The impact of PRIs on bank cost efficiency is more evident in the upper middle and high income group of countries than in the low and lower middle income group of countries. An appropriate level of PRI quality is essential to achieve both competition and development.
The paper highlights policy implications for international policy makers, regulators, and the management of banks who are interested in banking sector development across countries.
The study investigates the fundamental importance of PRI quality in its effect on the banking sector and extends the largely US-focused literature to a broader international setting.
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