Bank Equity Stakes in Borrowing Firms and Financial Distress

Abstract

an anonymous referee, seminar participants at the Board of Governors, the 1993 BRC/JFI Symposium on Financial Institutions, and the 1993 Western Finance Association meetings for helpful comments and discussions. They are not responsible for any remaining errors. Berlin thanks the Leonard N. Stern School of Business and the Indiana University School of Business for financial support. John thanks the Charles William Gerstenberg Chair and the Bank and Financial Analysts Association Faculty Fellowship for financial support. Saunders thanks the John M. Schiff Chair for financial support. The views expressed here are ours and do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.

Do the equity holding and soundness of bank underwriters affect issue costs of SEOs?

“…7 There is no definitive evidence from previous research that a bank's equity holdings will enhance or lower the bank's certification ability. Berlin et al (1996) argue that equity holdings by financial intermediaries enhance their certification capacity. Moreover, Li and Masulis (2004) suggest that equity investments in issuers improve the alignment of underwriter and issuer interests, thus causing underwriters to set relatively higher offer prices.…”

Does bank ownership increase firm value? Evidence from China

“…On one hand, banks can enhance firm value by providing valuable capital and monitoring (Gorton and Schmid, 2000;Kang et al, 2000). On the other, bank relationship may distort management's incentives; induce companies to move away from optimal financial and operational decisions, and hurt company valuation (Berlin et al, 1996;Mahrt-Smith, 2006). Given that existing studies show that how banks monitor borrowers depend on the severity of the agency problem (Harvey et al, 2004), our evidence from a leading emerging market adds new insights into optimal market design and contracting of lending in the emerging markets.…”

Should banks own equity stakes in their borrowers? A contractual solution to hold-up problems

“…6 Papers that examine whether bank debt should be senior or junior (Diamond, 1993;Welch, 1997) generally do not consider the issue of bank equity stakes. 7 Bank equity is addressed in Berlin et al (1996), who examine the quality-signaling effect of having an informed bank choose particular equity positions in its borrowers during periods of financial distress. 8 Boyd et al (1998) examine the effect that bank equity participation has on the riskiness of firm project choice.…”