The Effects of Foreign Strategic Investors on Bank Prudential Behavior: Evidence from China

Using China’s data between 1995 and 2014, we employ the propensity score matching and difference in differences approaches to investigate the effects of foreign strategic investors (FSIs) on bank prudential behavior, and find the following results. First, lending behavior and reserve behavior become prudential after introducing FSIs. Second, FSIs assigning directors or managers could improve the bank’s prudence. Third, the effects of FSIs on bank prudence are weaker in state-owned banks than in non-state-owned banks. Finally, further analyses show that FSIs may reduce bank risk through improving prudential behavior, that is, prudential behavior is a mediator between FSIs and bank risk.