Publications
Publications
- 2006
Does Banks' Corporate Control Benefit Firms? Evidence from US Banks' Control over Firms' Voting Rights
By: Joao A.C. Santos and Kristin Wilson
Abstract
In this paper we examine the importance of banks' corporate control over their borrowers by investigating the loan pricing effect of banks' voting stakes in borrowers. We exploit the fact that banks may hold shares of firms in a fiduciary capacity to identify a clean measure of banks' control over firms. These shares provide no direct cash incentives to banks, but they may give them control over a stake of the firm's voting rights. Our investigation of the loan interest rates shows that banks offer an interest rate discount when they lend to borrowers in which they have a voting stake. This finding is robust to a number of firm- and loan-specific controls as well as to banks' selection of trust investments. Our investigation also shows that banks give larger interest rate discounts in connection with their voting stakes when when they have more authority to exercise the voting rights under their control, when they they lend to riskier borrowers and to borrowers whose management owns a smaller share of the firm's capital. These results lend important support to the hypothesis that banks' voting stakes in borrowers are effective in managing the risk-shifting incentives of borrowers.
Keywords
Citation
Santos, Joao A.C., and Kristin Wilson. "Does Banks' Corporate Control Benefit Firms? Evidence from US Banks' Control over Firms' Voting Rights." American Finance Association, 2006.