Excess Control Rights, Bank Capital Structure Adjustment and Lending
43 Pages Posted: 31 Mar 2014 Last revised: 15 Apr 2014
Date Written: March 30, 2014
We investigate whether excess control rights of ultimate owners in pyramids affect banks' adjustment to their target capital ratio. When ultimate control rights and cash-flow rights are identical, banks increase their capital ratio by issuing equity and by reshuffling their assets without slowing their lending. However, when control rights exceed cash-flow rights, banks are reluctant to issue equity to increase their capital ratio and, instead, shrink their assets by mainly cutting their lending. A deeper investigation shows that this behavior is only apparent in family-controlled banks and in countries with relatively weak shareholder protection rights. Our findings provide new insights in the capital structure adjustment process and have critical policy implications for the implementation of Basel III.
Keywords: dynamic capital structure, bank lending, pyramids, excess control rights, European banking
JEL Classification: G32, G21, G28
Suggested Citation: Suggested Citation