Does banks’ corporate control benefit
firms? Evidence from US banks’ control
over firms’ voting rights
Joao A. C. Santos and Kristin E. Wilson
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.?
Questions on the causes
• Banks can vote share in trust, have thus control rights without
• 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
• 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?
• 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?
• 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?
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,