Bank and Product Market Competition: The Role of Banks' Equity Stakes in Industrial Firms

Abstract

This paper provides novel evidence that banks holding equity stakes in nonfinancial firms can influence product market competition. Using mergers between a firm's bank and the equity holder of its rivals as an exogenous shock, I find that the firm whose bank acquires significant equity stakes in its rivals through mergers experiences reduced price markups. The effect is more pronounced in less competitive credit markets and when banks are dominant lenders in firms' industries, where banks can charge higher interest rates to firms and thereby weaken their competitive strength in the product market. In addition, the impact of bank equity stakes in rivals on reduced firm price markups is stronger when banks' payoff sensitivity to the performance of rivals is greater.

Keywords: bank equity holdings, product market competition, price markups