Universal Banks and Corporate Control: Evidence from the Global Syndicated Loan Market

Abstract:     
We investigate the effects of bank control over borrower firms whether by representation on boards of directors or by the holding of shares through bank asset management divisions. Using a large sample of syndicated loans, we find that banks are more likely to act as lead arrangers in loans when they exert some control over the borrower firm. Bank-firm governance links are associated with higher loan spreads during the 2003-2006 credit boom, but lower spreads during the 2007-2008 financial crisis. Additionally, these links mitigate credit rationing effects during the crisis. The results are robust to several methods to correct for the endogeneity of the bank-firm governance link. Our evidence, consistent with intertemporal smoothing of loan rates, suggests there are costs and benefits from banks’ involvement in firm governance.

Number of Pages in PDF File: 57

Keywords: Universal banking, Syndicated loans, Corporate boards, Institutional ownership

JEL Classification: G21, G32

Accepted Paper Series