Banks as Stewards

Abstract

Banks may play a more active role in corporate finance than previously documented. We document that banks hire industry experts and then steward firms to undertake investments in expansion (new to the firm) sectors.  In supervisory data including detailed regulatory risk measures and granular loan-level industry attribution, expansion loans are double as likely to emerge in bank-firm potential pairs when the bank has precise industry specialization or higher degree experts. Results are robust to specifications that build off dynamic comparables strategies (Sun and Abraham, 2021), `within-firm' (Khwaja and Mian, 2008}) and `within-bank'  (Blickle et al., 2024) analyses, and fully saturated bank-firm-time models (Paravisini et al., 2023). Conceptualizing our setting, we frame that bank stewarding will be more prevalent where firms neglect expansion investment because of high discount rates. Empirically, the effect of bank expertise and specialization unlocking expansion loans is increasing in firms' short-termist discount rates.  Finally, we document the mechanism through loan pricing:  banks provide loans at 7-to-72 bps lower interest rates to induce loan volume, and thereby overcoming Kodak moments. Such expansion stewarding is likely most valuable in moments of transition for an industry.  We corroborate our general expansion evidence in the context of firm expansion investments from the energy transition.  Active bank stewarding moves the literature beyond the classic view of banks as mere credit providers.