Does Banks’ Corporate Control Lower Funding Costs? Evidence from US Banks’ Control Over Firms’ Voting Rights
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We investigate the effect of banks’ corporate control on the cost of bank lending. We exploit the fact that the shares banks hold in a fiduciary capacity can give them control over firms’ voting rights that are separate from firms’ cash flow rights. We find that banks offer firms an interest rate discount that is increasing with the bank’s voting stake in the firm. This finding is robust and appears to be driven by the bank’s voting rights. Banks offer larger discounts when they have more authority to exercise their voting rights, and no discount when they hold an equity stake that does not give them voting authority. Additionally, banks offer larger interest rate discounts to riskier borrowers, and firms that borrow from banks with voting rights experience lower stock volatility after they take out loans.
KeywordsCorporate control Trust business Voting rights Agency costs of debt
JEL ClassificationG21 G34
The authors thank an anonymous referee, the editor, Haluk Unal, and Manju Puri, Steve Drucker, Stijn Classens, Conrad Ciccotello, Bernard Black, and seminar participants at the 2007 EFA meetings, 2007 AFA meetings, Universidade Nova de Lisboa, Universidade Católica Portuguesa, Federal Reserve Bank of New York/Review of Financial Studies/Wharton Financial Institutions Center conference “Corporate Finance of Financial Intermediaries,” and the Journal of Financial Intermediation/World Bank conference “Bank Regulation and Corporate Finance” for valuable comments. The authors also thank Chris Metli and Kyle Lewis for outstanding research assistance. The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.
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