Two Essays on Institutional Investors and U.S. Bank Holding Companies

Abstract

This dissertation studies institutional investment in U.S. bank holding companies (BHCs). The first essay examines institutional investing preferences in U.S. banks and the impact of expansion of bank power on the preferences. Institutional investors prefer BHCs that hold more liquid assets, are better capitalized and larger in size, have better loan quality, lower stock return volatility and less derivative trading. In addition, the expansion of bank power is welcomed by various types of institutional investors, except for long-term institutions. Institutional investors also become less risk-averse when investing in BHCs that have expanded into non-banking business. However, the increased complexity and opaqueness of banks makes it harder for institutional investors to implement informative tradings, though grey and long-term institutions are less adversely affected than independent and short-term institutions. The second essay focuses on the 2008 financial crisis and investigates the under-researched area “the role of institutional investors in financial industry during crisis time”. It provides evidence that grey institutions (i.e. banks and insurance companies) have more information about banks’ risk exposure to securitization than do independent institutions (e.g. investment companies and public pension funds) as they shy away from banks with high risk exposure to securitization market, such as BHCs that hold more private-label MBS or BHCs that issue riskier securitization deals before the crisis. In addition, the trading of grey institutions before the crisis can also predict high-exposure banks’ abnormal returns around the Lehman Bankruptcy and is related to such banks’ operating performance during the crisis period.