Market Discipline in Banking: Evidence From Publicly and Privately Own Banks in Ghana

Abstract

The efficiency of the financial system and its architecture is vital to the economic growth of every country. Efficient financial largely ensures efficient firm capitalization, optimal capital investment decision making and risk management as such market through publicly available information has the ability assess whether the financial and investment approach adopted by banks are the best and detect signs of financial soundness. The market price of publicly traded securities issued by a bank reflects the latest market assessment of the bank’s financial condition.  In recent years there have been paradigm shift in effort of stakeholders in the financial market to greatly rely on market forces to prevent banking crisis. This require bank supervisors, to a higher degree, count on market discipline as it has been identified that “the real pre-safety-net” emanate from the market and it served as the first line of defense. From the perspective of market discipline theorist, the market can provide up-to-date signals to constraint any abnormal behavior of management, through firm securities price levels to achieve optimal performance. Thus, publicly traded banks performance with respect to risk taking, cost and profit efficiency is expected to be better than privately held banks. However, empirical results on this view remain are inconclusive. Thus, this study examined the effect of the capital market discipline on the performance publicly traded banks on the Ghana Stock Exchange as against privately own banks. The study adopted Two-Sample T-Test to examine the existence of significant difference between their performance with respect to cost, profitability, asset quality and return on equity. The results of this study are mixed. The study identified that publicly traded banks are efficient at liquidity risk management and maximizes shareholders wealth than privately own banks. However, in terms profit, cost efficiency and asset quality management they are not significantly different. Thus, the Ghana stock exchange has relatively insignificant disciplinary effect on listed banks’ management behavior to be more optimal in profit and cost.

Key Words: Market discipline, Cost efficiency, Publicly and privately own banks in Ghana, management behavior, systematic risk, rational expectation, Ghana stock exchange, disciplinary effect.