Dual Holding and Bank Risk

48 Pages Posted: 30 Mar 2021 Last revised: 13 Jan 2022

See all articles by Stefano Bonini

Stefano Bonini

Stevens Institute of Technology - School of Business

Ali Taatian

Stevens Institute of Technology

Date Written: October 26, 2021

Abstract

Using the 2007-9 financial crisis as a quasi-natural experiment, we show that banks with investors holding simultaneously both equity and bonds (dual-holders) exhibit lower risk and superior performance. Dual-holders' influence is higher in more opaque banks, indicating that the mechanism of transmission is through a decrease in information asymmetry and a reduction in debtholder-shareholder conflict. This effect translates into higher unconditional and risk-adjusted stock returns. These economically large results show that a market mechanism implemented by outside investors is strongly effective in mitigating excessive risk taking by banks thus providing important normative implications for the stability of financial systems.

Keywords: bank risk, dual holdings, financial systems

JEL Classification: G21, G28, G01

Suggested Citation

Bonini, Stefano and Taatian, Ali, Dual Holding and Bank Risk (October 26, 2021). Available at SSRN: https://ssrn.com/abstract=3815293 or http://dx.doi.org/10.2139/ssrn.3815293

Stefano Bonini (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Ali Taatian

Stevens Institute of Technology ( email )

Hoboken, NJ 07030
United States

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