Journal of Financial Services Research

, Volume 51, Issue 3, pp 283–311 | Cite as

Does Banks’ Corporate Control Lower Funding Costs? Evidence from US Banks’ Control Over Firms’ Voting Rights

Article

Abstract

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.

Keywords

Corporate control Trust business Voting rights Agency costs of debt 

JEL Classification

G21 G34 

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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.Federal Reserve Bank of New York & Nova School of Business and EconomicsNew YorkUSA
  2. 2.Kenan-Flagler Business SchoolUniversity of North CarolinaChapel HillUSA

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