Bank Blockholders & Firm Returns

The section begins by acknowledging the existing debate surrounding the impact of bank ownership on firm returns. Prior research has yielded inconsistent results, some showing negative effects, others positive, and some finding no clear relationship. This study proposes to reconcile these differences by focusing on the types of blockholder coalitions involving banks. Two opposing effects are identified: the bargaining effect, where difficulty in reaching agreements among heterogeneous blockholders implicitly protects minority shareholders from value-decreasing actions, and the disagreement effect, where difficulty in reaching consensus on investments leads to underinvestment, particularly with numerous blockholders. The paper highlights that the nature and composition of blockholder coalitions are crucial in determining their overall impact on firm performance and minority shareholder protection. This section lays the groundwork for the hypothesis that the presence of banks in a firm's ownership structure, particularly in coalitions with other banks, is negatively correlated with firm returns. The authors then introduce the concept of ‘private benefits of control’ which large shareholders (and potentially bank coalitions) seek at the expense of minority shareholders.

Building upon the introduction of bargaining and disagreement effects, this section develops a theoretical argument explaining why bank coalitions might negatively impact firm performance. The authors posit that when banks are main blockholders, especially in coalitions with other banks, there's a stronger incentive for minority shareholder expropriation. Three reasons support this: 1) A natural convergence of interests among homogeneous bank blockholders simplifies the process of agreeing on policies that benefit them at the expense of the minority; 2) Banks possess diverse means of expropriation, including leveraging their relationships to extract above-market fees for services provided to the firm; and 3) Banks may exert control even with non-significant stakes, acting as representatives for other shareholders while minimizing their own costs in the expropriation process. This section contrasts the potential positive effects of bank ownership – such as cost-effective monitoring, stable investment, and debt renegotiation – arguing that the negative expropriation incentives are likely to dominate when banks form coalitions, especially with other banks. The analysis concludes that the negative impact of bank coalitions on firm performance should be reflected in lower controlling stakes and diminished firm returns, setting the stage for the empirical testing of these claims.

This section reviews the existing literature on the relationship between institutional ownership (including banks) and firm returns. The review highlights the lack of consensus in this area, with some studies reporting negative effects, others positive, and others finding no significant relationship. This conflicting evidence underscores the need for a more nuanced analysis, particularly considering the composition of controlling blockholder coalitions. The authors propose two primary hypotheses. First, the presence of banks as main blockholders, particularly in homogeneous coalitions, should lead to lower controlling stakes than coalitions without banks (Hypothesis 1). This hypothesis stems from the idea that banks, aiming to minimize expropriation costs, will hold smaller controlling stakes. The second major hypothesis (Hypothesis 2A) predicts a negative impact on firm returns when banks are blockholders, especially in homogeneous structures with other banks. The discussion further elaborates on the impact of heterogeneous bank-non-bank coalitions, proposing Hypothesis 2B (implied in the section). The hypotheses combine the effects of blockholder homogeneity, the size of controlling stakes, and the resulting impact on firm performance, preparing the ground for the following empirical investigation using Spanish firms.

The empirical analysis utilizes data from the SABE database (Sistema de Análisis de Balances de Empresas Españolas), compiled by Bureau Van Dijk. This database contains information on over 200,000 Spanish firms, providing annual balance sheet and income statement data, along with ownership structures. The study focuses on firms with available ownership information, resulting in an unbalanced panel dataset of 4,435 firms with 12,629 observations covering the period 1996-2000. A significant characteristic of the sample is the high concentration of ownership, with 64.65% of firms controlled by a single shareholder holding more than 50% of the stake. The study focuses primarily on the two largest shareholders (main blockholders) to analyze controlling coalitions, noting that in 80.5% of cases, control rests with a single shareholder. The key variables include OWN2 (sum of stakes of two main shareholders), used to measure the total controlling stake, and various dummy variables to categorize different types of blockholder coalitions (e.g., BB for bank-bank coalitions, BNB for bank-non-bank coalitions, etc.). The dependent variables are Return on Assets (ROA) and the Q-ratio, representing accounting and market measures of firm returns respectively.

This section presents descriptive evidence on the ownership structure of Spanish firms and the role of banks within these structures. The analysis reveals that in most cases (80.5%), a single shareholder possesses a controlling stake. The average stake held by the main shareholder is 68.96%, while the second-largest shareholder holds an average of only 11.94%. This highlights the dominance of the main shareholder and supports the focus on the two main shareholders as the controlling blockholders. Further analysis examines the presence of banks within these coalitions, showing a clear tendency for banks to form coalitions with other banks rather than non-bank entities, suggesting a possible strategic alignment in their actions. The data shows a significantly lower combined stake (OWN2) of main blockholders in firms with bank involvement (60.3%) compared to the average firm (80.92%), particularly pronounced in large firms where bank involvement is prominent. This observation is consistent with the hypothesis that banks, in an attempt to minimize the costs associated with expropriating minority shareholders, may strategically reduce their controlling stake.

The econometric analysis utilizes two equations: one focusing on the combined stake of the two main shareholders (OWN2) and the other examining the effects on firm returns (ROA and Q-ratio). The analysis includes control variables such as firm size (LSALES), age (AGE), intangible assets (INTANG), and financial structure (DEQUITY), along with time and sector dummies. Endogeneity tests, such as Hausman and Sargan tests, are conducted to address potential issues. The results, presented in Tables X and XI, consistently demonstrate that bank-bank coalitions (BB=1) are associated with significantly lower controlling stakes (OWN2) compared to coalitions without banks. This observation supports the hypothesis that banks strategically reduce their stake to minimize expropriation costs. The analysis also confirms that the presence of banks, particularly in bank-bank coalitions, significantly negatively impacts firm returns (ROA), suggesting that banks engage in actions that harm firm value. This effect is notably stronger when the transition involves a bank gaining control and the other main shareholder is also a bank. The results are robust to changes in the structure of the analysis, including the use of various measures of firm returns (accounting data and market data).

The initial findings, based on the analysis presented in Table X, demonstrate a strong correlation between the presence of banks in controlling coalitions and the overall stake held by the two main blockholders. Specifically, coalitions involving two banks (BB=1) or one bank as either the main or secondary shareholder (BNB=1 or NBB=1) exhibit significantly lower combined stakes (OWN2) than coalitions without banks (NBNB=1). This supports Hypothesis 1, indicating that banks, anticipating potential costs associated with expropriating minority shareholders, tend to hold smaller stakes when involved in controlling coalitions. The results hold even when considering the dynamic changes in ownership structure, except in a specific transition (NBNB_NBB), which could warrant further investigation. The low combined stake observed in bank-involved coalitions provides initial evidence consistent with the strategic reduction of stakes to mitigate expropriation costs, a central idea within the theoretical framework of the research. The study notes that this result is not significantly impacted by concerns of endogeneity, lending credibility to the findings.

The core finding of the study is the significant negative effect of bank presence, especially within homogeneous bank-bank coalitions, on firm returns. The results, detailed in Table XI (and consistent with Table X), show that using Return on Assets (ROA) as a measure of firm profitability, there's a significant negative impact associated with the presence of banks as main blockholders within these coalitions. The analysis goes further to explore changes in the ownership structure. It highlights that a transition from a heterogeneous (one bank as secondary shareholder) structure to a homogeneous structure (two banks as main blockholders) yields an even stronger negative impact on firm returns than transitions in the opposite direction. Notably, this negative effect is mostly observed in the period after ownership changes; the changes themselves do not seem to affect ROA in the same period. While there's a non-significant relationship between ROA and the overall stake (OWN2), further affirming that the negative impact isn’t simply due to a reduction in controlling stake but rather is specifically linked to the presence of banks in the controlling coalition. These conclusions are reinforced with the use of market-based measures of firm returns like the Q-ratio, although the effect is less pronounced, highlighting the consistency of the results across different metrics.

The robustness of the negative relationship between bank coalitions and firm returns is emphasized throughout the analysis. The study highlights that the findings hold across both accounting-based measures (ROA) and market-based measures (Q-ratio) of firm performance, strengthening the overall conclusions. The study acknowledges limitations as well; while the findings consistently demonstrate the negative impact of bank involvement in controlling coalitions, it is worth noting the relatively low proportion of firms with banks as main blockholders in the dataset (2.76%). This is attributed to factors like the preponderance of non-listed and small firms in the sample and the inherent risk-aversion on the part of incumbent blockholders toward accepting banks as partners. The authors further emphasize that the absence of data on indirect participations may underestimate the true extent of bank involvement and influence on these firms, with the implication that the actual expropriation effects are likely to be even more substantial than the measured effect.

The empirical results strongly support the study's central hypotheses. The analysis confirms a significant negative relationship between the presence of banks in controlling coalitions and firm performance. This negative impact is particularly pronounced when banks form homogeneous coalitions with other banks. The findings, robust across both accounting (ROA) and market (Q-ratio) measures of firm returns, consistently demonstrate that bank-bank coalitions lead to lower firm profitability. Even when banks hold relatively low stakes in these coalitions, the negative impact persists, suggesting that the detrimental effect is driven by the banks' actions rather than simply the reduced size of their combined stake. Specifically, the results reveal a significant negative effect on ROA when banks become main blockholders, particularly in firms that did not initially have banks as main blockholders. These findings offer robust support for the hypotheses that predicted the detrimental impact of bank coalitions on firm returns, emphasizing the importance of bank coalition structure (homogeneous vs. heterogeneous).

The results reveal a non-significant relationship between Return on Assets (ROA) and the overall stake of the two main blockholders (OWN2), supporting the argument that the negative impact of banks isn't simply a consequence of reduced controlling stakes. Rather, it's the presence of banks within controlling coalitions, especially in homogeneous (bank-bank) structures, that drives the negative effect on firm profitability. The observation that firms in the sample do not seem to adjust their ownership structure in response to their return (non-significant coefficient of ROA on OWN2 estimations) further supports the idea that banks manipulate the ownership structure to maximize their own interests at the expense of minority shareholders. This finding contrasts with evidence from studies on US firms, highlighting potential differences in market liquidity and flexibility regarding ownership structures. The low stake held by bank coalitions, in contrast, may serve to minimize expropriation costs for those involved, while simultaneously maximizing the negative impact on firm returns.

Based on the evidence of bank expropriation when they hold controlling stakes, the authors suggest policy interventions to enhance firm efficiency. Share buy-backs are proposed as a potential mechanism to acquire shares held by banks and redistribute them to other types of blockholders or to the stock market. This would ideally reduce the controlling influence of banks and decrease the potential for expropriation, aligning the interests of banks more closely with overall shareholder value. The rationale behind this suggestion is supported by the cited findings of Yeo et al. (2002) and Graham Jr and Lefanowicz (1999) highlighting the positive relationships between unrelated blockholdings and firm performance. The study concludes by acknowledging a major limitation: the exclusion of indirect bank participations, a common practice in Spain, which likely underestimates the true extent of bank involvement and expropriation. Future research needs to address this to obtain a more accurate picture of the real ownership structure and the true extent of the negative impact of banks on firm returns.