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Globalization and Capital Markets by 2ix90rw8

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									Does banks’ corporate control benefit
firms? Evidence from US banks’ control
over firms’ voting rights
by
Joao A. C. Santos and Kristin E. Wilson



                              Comments by
                             Stijn Claessens
                               World Bank

                                               1
Findings and General Comments
• Argue that banks’ corporate control lowers agency costs,
  not to force them to borrow at lower costs
• The effect is large: 150 basis points in simple comparison,
  with control variables still 10-50 bps

• New issue for the US (at least); Nice set of data; Many
  robustness tests; and Surprising results!

• Could provide more examples of the mechanisms here at
  work (HP is not a good example)
• While multiple robustness tests, have still some residual
  suspicion that other channels are at play
• Contrast with other countries’ role of banks in commerce:
  control over corporations general bad: why (perhaps)
  different in the U.S.?

                                                                2
Questions on the causes
•       Banks can vote share in trust, have thus control rights without
        cash-flow rights.
•       May have (or gain contingent) control over firms that allows
        them to price loans cheaper
•       Question: is it control, information or value?
•       Control, possibly, but:
    –      Small stakes (0.349% on average, mostly less than 1%)
    –      In US (small) shareholder have very little influence
    –      Doctrine of equitable subordination should make banks reluctant
           to get involved with corporations’ management
•       Information, possibly, but:
    –      These are firms for which much information is available
    –      Chinese walls, officially at least, within banks
    –      Perhaps common analysis, e.g., economies of scale in equity
           investment and loan lending, leading to cost gains?               3
Framework
•       Value (due to other factors)
    –     We know subtle “benefits” in financial intermediation can translate
          into large values. And control goes two ways, use and misuse
    –     Banks can be softer to management, be allowed to lend at lower
          rates; even though firms may perform worse, it are the trust
          investors that pay with lower equity rates of return
    –     Could it be that banks get some business value out of running
          trust equity business of firms and then cross-subsidize lending?
•       Examples could help on what is going on
    –     What is it exactly that banks do with their votes?
          •   Do they vote against management more often? They use to (?)
          •   Do they only come in when there is a crucial vote or more often?
          •   Do they vote in situations of near financial distress? And get a better
              share of the value that way? Or
          •   Are banks softer on management (and get a loan out of it)?
•       How do banks compare to other investors that face this?
    –     Do unaffiliated mutual funds, e.g., Fidelity, vote differently?
    –     Is their behavior not the right control for the empirics?
                                                                                        4
Empirical Framework
•       Empirical setup
    –     Controlling for endogeneity is key in these tests
    –     Paper does a very good job of running all kind of tests
•       Some questions, nevertheless, on empirics
    –     Are spreads all-in-costs? How about re-pricing of loans?
    –     Like to know more on other shareholders and ownership
          structures to see whether bank can exert any influence and
          whether corporate governance is effective in the first place
    –     Can control for the corporate governance practices of firm
    –     Suspect size to play a large role in vote and other factors: more
          interaction effects of size with some variables?
    –     Not sure the choice of vote-non-vote is purely exogenous: could
          have banks choose investments taking investors’ preference into
          account if this is known (which is likely)
    –     What is the shared voting authority? Can one assume the same
          as sole voting authority?

                                                                              5
Empirical Extensions
•   The covenants are interesting as they go most directly
    to the agency, moral hazard issues
•   Not clear that they (just) confirm agency issues, could
    still be information story (e.g., learn more about firm by
    holding equity which reduces need for collateral)
•   Can do “system” regressions: explain both spreads and
    covenants (since spreads are function of covenants) as
    functions of control rights
•   Like to know more on the lending structures (e.g.,
    syndicated loans versus single finance) to see
    importance of covenants relative to lending structure
•   Who are the lenders? Are large lenders also large trust
    fund firms? A bias? Do they lend at softer terms as
    these are the better clients? Are they also investment
    banks? Some soft understanding on underwriting?


                                                                 6
Policy Issues and Implications
• The paper can expand on implications since one
  always worries when there are control rights
  without cash-flow rights
  – Are equity-holders and banks here both better off or
    does this happen at somebody’s advantage?
  – Is this (another) area where government needs no
    longer to impose restrictions?
• Lessons for other countries
  – Links banking-commerce traditionally viewed
    suspiciously, also in the US
  – When does this work well, if ever, and when not? Are
    conflict of interests taken care of by reputation,
    competition, etc?



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