Corporate Capital Structure and Regulation of Bank Equity Holdings: Some International Evidence

Abstract

Using data from six OECD countries, we examine the proposition that the costs associated with shareholder-debtholder agency conflicts can be reduced by allowing banks to hold equity in the firms to which they lend. Although the sensitivity of leverage to potential wealth expropriation is indeed significantly lower in Japan than in the U.S., no observable difference exists between the U.S. and the non-Japanese countries where banks are permitted to hold corporate equity. This "Japan effect" does not appear to be due to the Japanese keiretsu structure. We conclude that any differences in the debt-agency relationship between Japan and the U.S. are unlikely to be due to differences in restrictions on bank equity holdings.