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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

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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.?

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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?

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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?

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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?

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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?

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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?