When Shareholders Are Creditors: Effects of the Simultaneous Holding of Equity and Debt by Non-commercial Banking Institutions

Jiang, Wei; Li, Kai; Shao, Peng

doi:10.1093/rfs/hhq056

Cited by 201 publications

(127 citation statements)

References 44 publications

Supporting

Mentioning

110

Contrasting

Order By: Relevance

“…In principle, the conflicts of interest and information asymmetry between shareholders and creditors could be mitigated when banks are also the shareholders of the same firms (Kroszner and Strahan, 2001); the mitigation of these conflicts could lead to easier access to bank loans (Kang and Shivdasani, 1995;Barth et al, 2006;Lin et al, 2009) and lower cost of loans (Jiang et al, 2010). China is identified as having an underdeveloped financial system and lacking a public bond market; banks are the main providers of capital, while bank credit is scarce (Cull and Xu, 2000;Firth et al, 2008).…”

Section: Hypothesis Developmentmentioning

confidence: 99%

“…Moreover, as banks are more likely to allocate capital to financially healthier non-SOEs using commercial judgments Chen et al, 2013), and as dual holders are better informed and have access to more inside information, which can help banks to evaluate these non-SOEs more accurately, we expect that banks' dual holding leads to optimal lending decisions towards non-SOEs. In addition, since dual holding may effectively alleviate agency problems between creditors and borrowers (Kroszner and Strahan, 2001;Jiang et al, 2010) To extend our collusion story by providing direct evidence on how the potential collusion between managers of firms and banks is averted, we further examine how ownership structure (ownership concentration and owner type) affects the relationship between dual holding, lending decisions and investment efficiencies in non-SOEs. Shleifer and Vishny (1986) show that some degree of ownership concentration enhances firm performance because large block shareholders, in a position to harvest a substantial portion of the gains from improvement in firm performance or a takeover, have some incentive and resources to monitor management decisions.…”

Section: Hypothesis Developmentmentioning

confidence: 99%

“…Some studies from developed markets agree that dual holding can help to internalize the conflicts of interest between shareholders and creditors and to obtain proprietary information about the firm due to dual holders' involvement on both the debt and equity sides. Thus, these studies find that dual holding can benefit firms by promoting their access to bank capital and improving their performance (Kang et al, 2000;Mahrt-Smith, 2006;Jiang et al, 2010). Meanwhile, another strand of studies focuses on the harmful effects of dual holding, arguing that it leads to potentially more serious conflicts of interest (Diamond, 1984;Welch, 1997).…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Does banks’ dual holding affect bank lending and firms’ investment decisions? Evidence from China

Pan

Tian

2015

Journal of Banking & Finance

View full text Add to dashboard Cite

This study investigates the effect of banks' dual holding on bank lending and firms' investment decisions using a sample of listed firms in China. We find that dual holding leads to easier access to bank loans, a result that is more pronounced for non-state-owned enterprises (non-SOEs) than SOEs. We also find that dual holding distorts banks' lending decisions and harms the investment efficiency for SOEs, while resulting in optimal lending decisions and enhanced investment efficiency for non-SOEs. For non-SOEs, further analysis suggests that optimal lending decisions and efficient investment can be achieved for firms with higher ownership concentration, and firms in which the family and foreign investors are the controlling shareholders. We argue that, in emerging markets, whether a bank plays a monitoring role by directly holding the debt and equity claims of companies relies heavily on whether the potential collusion between firm executives and bank managers can be averted, which in turn is determined by the firms' governance framework and ownership structure. AbstractThis study investigates the effect of banks' dual holding on bank lending and firms' investment decisions using a sample of listed firms in China. We find that dual holding leads to easier access to bank loans, a result that is more pronounced for non-state-owned enterprises (non-SOEs) than SOEs. We also find that dual holding distorts banks' lending decisions and harms the investment efficiency for SOEs, while resulting in optimal lending decisions and enhanced investment efficiency for non-SOEs. For non-SOEs, further analysis suggests that optimal lending decisions and efficient investment can be achieved for firms with higher ownership concentration, and firms in which the family and foreign investors are the controlling shareholders. We argue that, in emerging markets, whether a bank plays a monitoring role by directly holding the debt and equity claims of companies relies heavily on whether the potential collusion between firm executives and bank managers can be averted, which in turn is determined by the firms' governance framework and ownership structure.

show abstract

Section: Hypothesis Developmentmentioning

confidence: 99%

Section: Hypothesis Developmentmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Does banks’ dual holding affect bank lending and firms’ investment decisions? Evidence from China

Pan

Tian

2015

Journal of Banking & Finance

View full text Add to dashboard Cite

show abstract

“…Nowadays, the corporate finance researches attach great importance to the role of banks in the management of enterprises [1][2][3]. In fact, companies resort to banking indebtedness.…”

Section: Introductionmentioning

confidence: 99%

“…A very recent study has revealed that the Monopoly Commission limited the banks' participation to the amount of 5% of the companies' capital. The banking regulations in Keywords: Bankers on board; Banks as shareholders; Firm's Performance; Anglo-Saxon Introduction Nowadays, the corporate finance researches attach great importance to the role of banks in the management of enterprises [1][2][3]. In fact, companies resort to banking indebtedness.…”

mentioning

confidence: 99%

Bankers on Board, Banks as Shareholders and Firm ’s Performance: Case of the Tunisian Listed Companies

Affes¹,

Nh²

2016

J Bus Fin Aff

View full text Add to dashboard Cite

according to the assumption of the agency costs of debt-equity, the banks' presence in the Board of Directors negatively effects on the company's value. Bubna and Radhakrishnan [5] showed that there are information asymmetries between the shareholders and the creditors. According to this hypothesis, the presence of banks in the board of directors reduces the information asymmetries between the firms and the creditors and consequently improves the companies' value.The existence of conflicts of interest between the shareholders and the creditors is reduced by a set of internal and external mechanisms. The board of directors and ownership structure are two alternative mechanisms of governance and control. Besides these two internal governance mechanisms, the presence of banks in the board of directors and ownership structure are also two governance mechanisms since this presence is associated with a reduction of the agency costs due to the conflicts of interest between the shareholders and the creditors.The practice of the banks' participation in the firms' capital depends on the country considered. Actually, in France, for example, banks are under no obligation to participate in the firms' capital. However, the American legislation and more particularly the Glass-Steagall Act (1933) prevents banks from participating in the firms' capital. Recently, the American legislation, through the Gramm-Leach-Bliley Act, has given commercial banks the opportunities to participate in the capital of firms. Besides, Germany, which encourages the banks' participation in the companies' capital, introduced some restrictions which were discussed in the Bundestag (1977). A very recent study has revealed that the Monopoly Commission limited the banks' participation to the amount of 5% of the companies' capital. The banking regulations in Keywords: Bankers on board; Banks as shareholders; Firm's Performance; Anglo-Saxon Introduction Nowadays, the corporate finance researches attach great importance to the role of banks in the management of enterprises [1][2][3]. In fact, companies resort to banking indebtedness. The nature of the relationship between banks and enterprises depends on the country and the existing regulations. Unlike Germany and Japan, where financing takes place via banks, the Anglo-Saxon financial markets play an important role in the funding and control of companies. German companies maintain long term relationships with a Bank called "Hausbank". A fundamental characteristic of these banks is their participation in the companies' capital and funding them Moreover, the Japanese Keiretsu system enables banks to become shareholders and members in the Board of Directors. The bank ownership is a very widespread phenomenon in the Japanese banking systems and the continental Europe. The theory recognizes the ability of the bank holdings on the liabilities of big businesses to improve the control system of the leaders. Moreover, the presence of banks in the capital of companies improves the quality of information they have, wh...

show abstract

Institutions: Rules and Investors

Puente

2022

Private Equity and Financial Development in Latin America

View full text Add to dashboard Cite

When Shareholders Are Creditors: Effects of the Simultaneous Holding of Equity and Debt by Non-commercial Banking Institutions

Cited by 201 publications

References 44 publications

Does banks’ dual holding affect bank lending and firms’ investment decisions? Evidence from China

Does banks’ dual holding affect bank lending and firms’ investment decisions? Evidence from China

Bankers on Board, Banks as Shareholders and Firm ’s Performance: Case of the Tunisian Listed Companies

Institutions: Rules and Investors

Contact Info

Product

Resources

About