The Study On Self-discipline Effect Of China's Listed Banks' Franchise Value

Moral hazard is one of several major issues in banking. As limited liability creates incentives for bank owners to take excessive risk, the moral hazard may lead to bank crisis. The stability of financial system is dependent on the elimination of the moral hazard. Several papers argue that franchise value works to reduce the moral hazard problem by increasing the cost of bankruptcy, so it acts as a disciplinary device against risk-taking. Usually, banks with higher franchise value will be prone to choose prudential strategy in order to protect themselves from bankruptcy. Meanwhile franchise value can make the supervisor's job easier by reducing banks'risk-taking. As for China's banks in the post-transition period, it is very important to study the self-discipline effect of banks'franchise value.This paper discusses the scientific definitions and the sources of franchise value at first, then expresses the process of its formation by microeconomics theory. The theory of financial restraint, rent incentives and inherent incentive supervision, provides a basis for the self-discipline effect of franchise value. In order to explain the effect, we construct three models—two-times model, option model and three-phases model. Through the analysis between franchise value and risk-taking, we can gain the conclusion that franchise value is disciplinary device of bank. Next, with a panel data of five listed banks between 1999 and 2006 as the sample, we can measure the franchise value using the method of Tobin's Q and constitute the model of multiple linear regressions. We can find that franchise value has a disciplining effect in the five ones. However, following with the competition in our country, the franchise value is declining. Then, the efficiency of bank becomes the key factor of franchise value, which is in favor of the bank's soundness in the period of transition. On the basis of the argumentation of self-discipline effect, the paper expresses three problems: 1.The reason why the effect doesn't exist in state-owned commercial banks; 2.Not all rent is useful, the effect lies on who possesses the rent; 3.Financial liberalization will erode the franchise value.Finally, the paper puts forward some countermeasure to protect the franchise value and its incentive effect. We should control the pace of financial opening, strengthen banking regulation, and quicken the step of banking reform.