Institutional Shareholders and Bank Capital

52 Pages Posted: 13 May 2018

See all articles by Alexandre Garel

Alexandre Garel

Audencia Business School; Labex ReFi

Arthur Petit-Romec

SKEMA Business School; Université Côte d'Azur

Rudi Vander Vennet

Ghent University - Department of Financial Economics

Date Written: April 30, 2018

Abstract

While the benefits of higher bank capital for financial stability are largely uncontested, there is a strong disagreement on how bank capital affects shareholder value (i.e., whether higher capital is privately optimal from the perspective of bank shareholders). In this paper, we explore institutional investors’ preferences for bank capital for a sample of U.S. listed banks. We show that institutional ownership is positively (negatively) associated with bank capital (leverage). This association is robust to controlling for asset risk, executive compensation structure, and proxies for shareholder-friendly governance. Additional tests reflect that the association is not primarily due to a selection effect but rather reflects a direct influence of institutional shareholders. Further analyses show that the relationship between bank capital and institutional investors is stronger for investors that are likely to place a higher weight on the stability benefits of bank capital (long-term investors and block-holders). Institutional ownership tends to be lower in banks than in non-banks and complementary tests show that this explains a significant fraction of the difference in leverage ratios between banks and non-banks. Our results suggest that institutional shareholders view bank capital as privately optimal and complement banking regulation in increasing bank capital.

Keywords: Bank Capital, Leverage, Institutional Investors, Capital Structure, Financial Stability

JEL Classification: G21, G23, G28, G32

Suggested Citation

Garel, Alexandre and Petit-Romec, Arthur and Vander Vennet, Rudi, Institutional Shareholders and Bank Capital (April 30, 2018). Available at SSRN: https://ssrn.com/abstract=3170898 or http://dx.doi.org/10.2139/ssrn.3170898

Alexandre Garel

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

Labex ReFi ( email )

79 avenue de la République
Paris, 75011
France

Arthur Petit-Romec (Contact Author)

SKEMA Business School ( email )

Sophia Antipolis
France

Université Côte d'Azur ( email )

France

Rudi Vander Vennet

Ghent University - Department of Financial Economics ( email )

Ghent, 9000
Belgium
+32 9 264 35 13 (Phone)
+32 9 264 35 92 (Fax)

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