Banks' equity holdings and their impact on securities issues

• Author: Josep AD. Tribó
• Published date: 01 January 2019
• Date: 01 January 2019
• DOI: http://doi.org/10.1111/corg.12257

ORIGINAL MANUSCRIPT

Banks' equity holdings and their impact on securities issues

Josep AD. Tribó

Department of Business Administration,

Universidad Carlos III de Madrid, Calle Madrid,

126, Getafe (Madrid), Spain, 28903

Correspondence

Josep AD. Tribó, Universidad Carlos III de

Madrid, Department of Business

Administration, Calle Madrid, 126, Getafe

(Madrid), Spain, 28903;

Email: joatribo@emp.uc3m.es

Funding information

Comunidad de Madrid, Grant/Award Num-

bers: EARLYFIN‐CM and S2015/HUM‐3353;

WRDS‐UC3M: Infrastructure for large scale

data processing, FEDER, Grant/Award Num-

ber: UNC315‐EE‐3636; Ministerio de

Educación y Ciencia, Grant/Award Numbers:

ECO2015‐68715‐R, ECO2012‐36559,

ECO2009‐10796, SEJ2006‐09401 and

SEJ2004‐07877‐C02‐02; Fundación Ramón

Areces

Abstract

Manuscript Type: Empirical.

Research Question/Issue: In this paper we study the impact of banks' stakes in

firms on the use of market mechanisms like securities issues by firms to raise funds.

Research Findings/Insights: There is a U‐shaped connection between banks' stakes

and the likelihood of issuing securities. Interestingly, the balance between the nega-

tive (expropriating) and the positive (strategic) effects leans relatively more towards

the strategic effect for Anglo‐Saxon countries. We provide empirical evidence of

these claims using an international database of 45 different countries with 20 091

observations distributed along the period 2000–2013.

Theoretical/Academic Implications: We posit that banks take an equity position in

firms either to expropriate the current shareholders or to strategically open the pos-

sibility of future business opportunities once firms are listed and can issue securities.

The first effect, which dominates for low equity stakes, hinders securities issues. Con-

versely, the second (strategic) effect appears for high banks' stakes, particularly when

these banks have underwriting capacity, and stimulates the issuance of securities. The

interaction of both effects leads to the aforementioned U‐shaped relationship

between banks' stakes and securities issues.

Practitioner/Policy Implications: It is important that policymakers take into consid-

eration the institutional contexts in their policy recommendations connected to the

relationship between banks and markets. In particular, certain calls to reduce banks'

stakes in borrowing firms as a way to stimulate the use of financial markets to raise

funds may generate the opposite effect in Anglo‐Saxon countries or when banks'

stakes are large in non‐Anglo‐Saxon ones.

KEYWORDS

Corporate Governance, Banks, Securities Issues

1|INTRODUCTION

Since the early days of Modigliani Miller, a central issue of the litera-

ture on corporate governance has been the analysis of the interlinkage

between ownership structure and firms' financial investment deci-

sions. Ownership structure is a central element of firms' corporate

governance, given its direct impact on the two main agency problems

affecting firms, which are also connected to firms' financing decisions.

First, the characteristics of firms' ownership determine the monitoring

of managers in order to prevent their opportunistic behavior (Shleifer

& Vishny, 1986). Second, the expropriation of minority shareholders is

deeply connected with the power of large shareholders (Claessens,

Djankov, Fan, & Lang, 2002; Lins, 2003). Thus, significant shareholders

(blockholders) through their stakes in firms (ownership concentration),

and conditional on their types, have the power to shape firms' finan-

cial investment decisions.

The effect of ownership concentration on firms' financing deci-

sions has been widely analyzed (for a review, see Aslan & Kumar,

Received: 27 March 2017 Revised: 13 July 2018 Accepted: 13 July 2018

DOI: 10.1111/corg.12257

Corp Govern Int Rev. 2019;27:45–60. © 2018 John Wiley & Sons Ltdwileyonlinelibrary.com/journal/corg 45

2012, for example). However, the analysis of the characteristics of the

blockholders in the controlling groups and the effect on firms' deci-

sions has been less explored (Bennedsen & Wolfenzon, 2000; Zwiebel,

1995). These characteristics together with blockholders' stakes will

have an impact on the aforementioned agency problems which will

in turn determine firms' financing decisions and the costs of using a

particular financial instrument. Within this setting, it is particularly

interesting to analyze the presence of banks as significant

blockholders, given their unique role as potential lenders, shareholders

and underwriters (Kroszner & Strahan, 2001a, 2001b). This paper

attempts to fill this gap and analyzes the impact of blockholders' bank

stakes on a particularly relevant decision regarding firms' financing;

the use of financial instruments traded on financial markets.

Bank equity holdings, although restricted in the US,

1

are common

in continental Europe (Allen & Gale, 2001). The literature in this area

has provided different arguments to justify the role of banks as equity

and debtholders in non‐financial firms (Mahrt‐Smith, 2006). Berlin,

John, and Saunders (1996) emphasize that banks may hold equity

blocks to be able to expropriate other uninformed investors. Other

authors (Hellmann, Lindsey, & Puri, 2004) show that banks strategi-

cally buy stakes in firms as an option to enjoy rents as future lenders

or security underwriters of the firm. This is consistent with the find-

ings of Arikawa and Miyajima (2005), who show for Japan that as

growth opportunities increase, firms rely more on market financing

rather than bank financing. Yasuda (2007) for Japan, and Yasuda

(2005) for the US find that banks' equity holdings, particularly when

combined with bank loans, have a positive impact on the likelihood

of being chosen as underwriters, given that this feature is interpreted

positively by financial markets. Then, lending banks may strategically

maintain equity holdings as a way to enter into the bond or equity

underwriting market.

In this paper we argue that if banks invest in firms for either

expropriation or strategic reasons, then banks' ownership must have

a differential impact on firms' financing decisions and, particularly, on

firms' decisions to issue securities. We discuss that, according to

expropriation motives, banks have lower incentives to stimulate new

issues of securities by firms because expropriation is more difficult

under the scrutiny of the financial markets (Faccio, Lang, & Young,

2001). Conversely, strategic motives increase banks' incentives to

facilitate issues of securities by firms because this opens the possibility

of enjoying greater rents as security underwriters (Bharath, Dahiya,

Saunders, & Srinivasan, 2007; Drucker & Puri, 2005) or future lenders

to listed firms (Antão, Ferreira, & Lacerda, 2011). Hence, if the first

effect is the relevant one, the relationship between bank holdings

and securities issues should be negative, whereas the relationship

should be positive if the latter effect prevails.

The literature has shown mixed evidence about the relationship

between banks' equity holdings and the issue of securities. On the

one hand, Miarka and Tröge (2005) use a sample of Japanese firms

to show a positive relationship between the presence of banks'

stakeholdings in firms and the likelihood of these firms issuing public

debt. They argue that external investors delegate monitoring tasks to

banks and that this aspect favors the issuance of bonds by the firm

under better conditions of finance (i.e., with a lower cost of capital).

Conversely, Kroszner and Strahan (2001a) do not find this positive

delegation monitoring relationship and they connect this non‐positive

result with the conflicts of interest between lenders and shareholders.

In this paper we conciliate both results resorting to the stake of

banks as a pivotal element to distinguish the twosituations. We show

thata nonlinear(U‐shaped) relationship exists betweenthe size of banks'

equitystakes and the likelihood that their partially‐ownedfirms will issue

new securities, whetherin the primary or the secondary market. In par-

ticular,when bank stakes are low, the relationship between banks'stakes

and equityas well as debt issues is negative. However,the relationship is

positive when bank equitystakes are high. We argue that this nonlinear

relationshipexists because the balance between the expropriationeffect

and the strategic effect is contingent on banks' equity stakes. When

stakes are low, the expropriation argument dominates because banks

with low stakes do not fully internalize the expropriation costs; hence

the negative relationship dominates. For large stakes, expropriation

costs are toohigh and so banks prefer to bet on the possibilityof gaining

future business opportunities, which is more likely if banks hold large

stakes. Such business opportunities are connected to underwriting

and/or lending activities and/or advising in activities like mergers and

acquisitions(M&A). The consequence is that in this scenario banks favor

the issuanceof securities. Remarkably, we have made use of a regulatory

shock (the Basel II accord) to tackle endogeneity concerns connecting

ownership structure and financialstructure.

In addition, we have adopted an international perspective in our

analysis comparing Anglo‐Saxon versus non‐Anglo‐Saxon countries.

We find that the balance between the strategic and the expropriating

effect leans relatively more towards the former for Anglo‐Saxon coun-

tries in comparison to non‐Anglo‐Saxon ones. This result is consistent

with a more complementary relation between bank equity financing

and market financing in Anglo‐Saxon countries in comparison to

non‐Anglo‐Saxon ones.

Finally, we find an additional “ex‐post”result. After an IPO and/or

security issues of banks' partially‐owned firms, there is an increase in

banks' stakes. We connect this result with the interests of these banks

in exerting influence on listed firms, which requires greater stakes, and

gaining access to future business opportunities such as securities

underwritings (strategic motive).

The remainder of the paper is organized as follows. We explain the

literature and formulate our hypotheses in Section 2. In Section 3, we

show the descriptive statistics of the main variables in our analysis. In

Section 4 we conduct the econometric study and present our main

results. We provide robustness analysis in Section 5. Section 6

concludes.

2|THEORY AND HYPOTHESES

2.1 |Ex‐ante hypothesis

The connection between banks' equity holdings and performance has

produced mixed results which highlight the pivotal role that banks'

stakes play in the different decisions implemented by their partially‐

owned firms. Here, we will focus on the decision to issue securities

whether in the primary market (IPOs) or in the secondary market—sea-

soned equity offerings (SEOs)—or negotiated corporate debt.

46 TRIBÓ