Dual holding and bank risk

Abstract

AbstractUsing the 2007–2009 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.