Does banks

1
Does banks corporate control benefit firms?
Evidence from US banks control over firms
voting rightsbyJoao A. C. Santos and Kristin E.
Wilson

• Comments by
• Stijn Claessens
• World Bank

2
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.?

3
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?

4
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?

5
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?

6
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?

7
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 somebodys 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?