Count on Me: Investment Banks and Prevention of Wealth Transfer in Share Repurchases

Abstract

We study how related conglomerates, financial conglomerates that had a previous advisory/underwriting relationship in the bond market with a firm and hold an equity stake in it, condition the firm's payout policy. We focus on share repurchases. We argue that the prior underwriting/advisory position in the bond markets leaves the conglomerate with a reputational concern about the institutions it has helped to place bonds with that induces it to use its equity stake to push against the wealth transfer from bondholders to equityholders embedded in the repurchase. We find a negative correlation between the probability of the share repurchase and the equity ownership by the related conglomerate. An equity stake of the related conglomerate is also associated with lower stock abnormal returns, both around the repurchase and in the long run. In particular, companies with equity ownership by related conglomerates exhibit 3(7)-day abnormal returns lower by 0.65%(1.32%) and 1(2,3)-year abnormal returns lower by 4.52%(8.64%,12.17%) then the abnormal returns of companies with no equity ownership by related conglomerates. This leads to lower wealth transfer from the bondholders to the equity holders. Indeed, the related conglomerate's stake is linked to a lower increase in the bond yields: the higher the stake, the lower the drop in price of the bonds around the repurchase. We present evidence that equity ownership by related conglomerates reduces the magnitude of wealth transfer in our sample by about 1/3.