Banks' equity holdings and their impact on securities issues

Abstract

Manuscript Type: Empirical. Research Question/Issue: In this paper we study the impact of banks' stakes in firms on the use of market mechanisms like securities issues by firms to raise funds. Research Findings/Insights: There is a U-shaped connection between banks' stakes and the likelihood of issuing securities. Interestingly, the balance between the negative (expropriating) and the positive (strategic) effects leans relatively more towards the strategic effect for Anglo-Saxon countries. We provide empirical evidence of these claims using an international database of 45 different countries with 20 091 observations distributed along the period 2000–2013. Theoretical/Academic Implications: We posit that banks take an equity position in firms either to expropriate the current shareholders or to strategically open the possibility of future business opportunities once firms are listed and can issue securities. The first effect, which dominates for low equity stakes, hinders securities issues. Conversely, the second (strategic) effect appears for high banks' stakes, particularly when these banks have underwriting capacity, and stimulates the issuance of securities. The interaction of both effects leads to the aforementioned U-shaped relationship between banks' stakes and securities issues. Practitioner/Policy Implications: It is important that policymakers take into consideration the institutional contexts in their policy recommendations connected to the relationship between banks and markets. In particular, certain calls to reduce banks' stakes in borrowing firms as a way to stimulate the use of financial markets to raise funds may generate the opposite effect in Anglo-Saxon countries or when banks' stakes are large in non-Anglo-Saxon ones.