Networking Behind the Scenes: Institutional Cross-Industry Holdings and Information Frictions in Corporate Loans

Abstract

Institutional investors increasingly hold the equity of both industrial and financial firms. These cross-industry holdings link borrowers to banks that they have not borrowed from. We show that such linkages significantly lower firms’ loan spreads. This effect mostly arises from institutions disseminating information between portfolio firms and banks, which mitigates information frictions. Indeed, when we mute institutions’ incentives for information dissemination in a placebo test, the effect of bank-firm linkages diminishes. Further, banks act on the disseminated information and lend more to borrowers once the two parties become linked through institutions’ cross-industry holdings.

Keywords: institutional cross-industry holdings, institutional holding structure, information frictions, cost of loans, institution mergers