Financial Institution Mergers Research Articles

Shareholder-Creditor Conflict and the Resolution of Financial Distress

Abstract Constructing a comprehensive data set of financially distressed firms that restructured their debts from 2000–2014, we find that firms with financial institutions’ loan-equity simultaneous holdings are more likely to restructure out of court than to file for bankruptcy. The effect is stronger when loans are oversecured and when the expected bankruptcy costs are larger. We use mergers of financial institutions and instrumental variable estimations to address potential endogeneity concerns. Firms with simultaneous holdings experience higher stock returns. The evidence suggests that mitigating shareholder-creditor conflict results in cost-effective resolutions of financial distress. (JEL G20, G30, G33)

Common institutional ownership and stock price crash risk

AbstractThis paper presents new evidence on the economic benefits arising from common institutional ownership. We find a negative and significant effect of common institutional ownership on stock price crash risk. This effect is robust to a battery of robustness checks and is causal according to some identification tests, including difference‐in‐differences analyses on financial institution mergers. We find evidence that the negative effect is attributable to the monitoring role of common institutional owners—a role that is enabled by common owners' lower information processing cost and greater monitoring incentives owing to governance externalities. We also find that common owners negatively influence crash risk through constraining bad news hoarding and that common owners are more likely to force CEO turnover when a firm has higher crash risk. Overall, our results suggest that common institutional shareholders play a unique and effective monitoring role that fends off stock price crashes.

Dual Ownership and Risk-Taking Incentives in Managerial Compensation

Abstract This article studies how the three-way interaction among shareholders, creditors, and managers shapes firms’ executive compensation. Firms with a higher ownership share by “dual holders”—institutional investors that simultaneously hold equity and bond of the company—adopt a less risk-inducing compensation structure: less stock options and more inside debt. Exploiting financial institution mergers that increase or decrease dual ownership for portfolio companies, we identify a causal link between dual ownership and CEO compensation policies. Mutual fund proxy voting data suggest that shareholder voting is an important channel for dual holders to implement less convex contracts.

Does common ownership constrain managerial rent extraction? Evidence from insider trading profitability

This study identifies a new economic benefit of common institutional ownership, which refers to the increasingly contentious phenomenon of U.S. firms sharing stockholders with their industry competitors. We find a significantly negative relation between common ownership and insider trading profitability. The disciplinary effect of common ownership on opportunistic insider trading is particularly evident when the information effects of common ownership are greater, when common owners are more likely to benefit from positive governance externalities, and in the subset of trades made by opportunistic insiders. Using the exogenous variations in common ownership induced by financial institution mergers, we conduct a difference-in-differences analysis and find consistent results. We also provide evidence that common owners encourage firms to impose ex-ante restrictions on insider trading and take ex-post actions to discipline opportunistic insiders by voting against management. Overall, our findings suggest that common institutional shareholders have information advantages, governance incentives, and effective means to constrain opportunistic insider trading.

Measuring concentration in the Japanese loan and deposit markets

This study is the first to exhaustively calculate the degree of concentration in regional banking markets using the outstanding amount of loans and deposits at branches and headquarters of financial institutions in Japan. Calculating the Herfindahl-Hirschman Index (HHI) for loans and deposits for each prefecture and for each urban employment area for the period 2005–2019, we show differences in the HHI across regions and developments in these differences over time. Furthermore, we decompose the level of and changes in the HHI into two components: the contribution of the number of financial institutions and the contribution of the deviation of individual financial institutions’ market share from the mean. We also examine the extent of the increase in the HHI caused by mergers of financial institutions and its persistence. The main results obtained are as follows. First, while the HHIs for loans and deposits show an upward trend, the HHI for loans in large metropolitan areas, which was already low, continued to further decline, indicating that competition among financial institutions in large metropolitan regions, which already was severe, has continued to intensify. Second, increases in the HHI are not only due to reductions in the number of financial institutions but also to the growing variation in financial institutions’ market share. And third, while an increase in the loan HHI due to a merger of financial institutions is sustained for a certain period, the duration of such an increase tends to be shorter in regions with a low market concentration.

Organizational Culture Integration Initiation in Merger and Acquisition, Changing Work Culture and Employees’ Work Behavior

In most of the mergers of financial institutions, the issue of human side i.e. justice, satisfaction and work behavior of employees are neglected. But, the success of the new organization after Merger and Acquisition (M&As), largely depends on how actively and innovatively their employees work in the changed working environment. Hence, the purpose of this study is to explore the organizations’ initiation for cultural integration in M&As process in Nepalese financial institutions. Further, it aims to examine how cultural integration initiation influence employees’ satisfaction and their work behavior. This research follows inductive-deductive approach as the variables or issues were induced primarily and the data were analyzed with quantitative techniques. 234 responses from employees working in new organizations after M&As, from the large and small organization of M&As, and managerial and non-managerial level were collected based on organizational justice and social identity theory. Descriptive statistics were used to analyze the data. The result of the study revealed poor cultural integration initiation from the top management during M&As. Feeling of workplace injustice is being increased which caused deviant work behavior of the employees. This study emphasizes on the urgent need of organizational justice and enhancing the social identity of the employees working in all the M&As organizations. The consequences of the poor cultural integration initiation associated to organizational justice and social identity add on comprehensive framework of these theories.

Price asymmetries in the US airline industry

AbstractWe document price asymmetries in the US airline industry. We find evidence that the average airfare increases in response to rising fuel cost but does not decrease in response to declining fuel cost. In searching for the cause of price asymmetries, we find that common ownership, measured by overlapping institutional investors, is associated with greater price asymmetry in the airline industry. To mitigate endogeneity concerns, we exploit the variation in common ownership induced by the financial institution mergers and conduct a difference‐in‐differences test to establish the causal effects of common ownership on price asymmetry in the airline industry. In addition, airlines in highly concentrated markets exhibit more price asymmetries than those in low concentration markets. Our results support focal price tacit collusion as an important determinant of asymmetric pricing. Furthermore, first‐class airfares are shown to decrease more slowly than economy‐class airfares in response to fuel cost decreases, which supports consumer search as the mechanism driving asymmetric pricing.

Common ownership, price informativeness, and corporate investment

Using financial institution mergers as exogenous shocks to common ownership, we find that stock prices of commonly held firms incorporate future earnings news more quickly and are less sensitive to noise trades. Our analyses show that the increase in price informativeness is associated with: (1) increases in disclosure, (2) enhanced information production and diffusion, and (3) active trading by common owners. Further, we find that the investment sensitivity to Tobin's Q for commonly held firms is higher, indicating that managers of such firms rely more on market prices for information. These results are robust to controlling for the financial crisis, and to alternative control groups. Our findings suggest that common ownership has a positive effect on information production and influences real corporate decision by improving price informativeness.

Institutional dual holdings and risk-shifting: Evidence from corporate innovation

This paper analyzes the impact of shareholder-creditor conflicts on corporate risk-taking. Specifically, I examine the role played by institutional dual-holders (i.e., those simultaneously holding the same firm's debt and equity) in corporate innovation. Baseline results show that firms held by dual-holders generate fewer but more valuable patents. To alleviate endogeneity concerns, I use a difference-in-differences approach based on financial institution mergers. Further analysis suggests that decreased sensitivity of managerial compensation to firm risk might be a possible channel. Overall, I provide new evidence that shareholder-creditor conflicts indeed exist and lead to risk-shifting, and that dual ownership can partially mitigate this problem.

Common institutional ownership and corporate social responsibility

We examine relationship between common institutional ownership and corporate social responsibility (CSR). We find that common institutional ownership is negatively associated with the level of CSR, which supports an anti-competitive view. We conduct a propensity score matching (PSM) analysis and a difference-in-differences (DiD) analysis based on a quasi-natural experiment of financial institution mergers. The results alleviate concerns about endogeneity. Using the DiD setting, we find further support for the anti-competitive view, and can rule out alternative explanations. Additional analyses on investor characteristics show that our results come mainly from common owners with long-term investment horizons or lower social inclination. Moreover, we find that the anti-competitive effect is more pronounced for mature firms, and for firms in industries with lower labor intensity and lower customer sensitivity.

Great Trees are Good for Shade: Creditor Monitoring Under Common Ownership

Existing studies show that common ownership across multiple industry firms improves corporate governance, because such common owners internalize governance externalities and possess industry-wide expertise. I study whether creditors perceive common owners as allied monitors or powerful expropriators. Using financial institution mergers to establish causality, I find that creditors impose less restrictive covenants on loans to firms with higher common ownership. It is mainly pronounced in financially risky firms with no blockholder or lower creditor bargaining power. This indicates that creditors account for the benefits from common ownership governance, and therefore exert less monitoring effort in firms with higher common ownership.

Common Ownership, Price Informativeness, and Corporate Investment

Using financial institution mergers as exogenous shocks to common ownership, we find that stock prices of commonly held firms incorporate future earnings news more quickly and are less sensitive to noise traders. Our analyses show that the increase in price informativeness is due to: (1) increase in disclosure, (2) enhanced information production and diffusion, and (3) active trading by common owners. Further, we find that the investment sensitivity to Tobin’s Q for commonly held firms is higher, indicating that managers of such firms rely more on market prices for information. These results are robust to controlling for the financial crisis, and to alternative control groups. Our findings suggest that common ownership has a positive effect on information production and influences real corporate decision by improving price informativeness.

Lending Relationships Along Ownership Lines: Institutional Cross-Ownership and Bank Loan Contracts

We find that banking relationships built through institutional cross-ownership influence the granting of loans as well as loan contract terms. Specifically, firms newly added to institutional cross-owners’ portfolios are more likely to borrow from banks that previously issued loans to other firms with the same institutional cross-ownership within the previous three years. These related banks also charge lower loan interest spreads than unrelated banks, and this effect is stronger for borrowers with high information asymmetry, low accounting quality, more financial constraints, and with dedicated institutional cross-owners. Both the lending probability and interest spread effects are robust to different fixed effects specifications as well as to a difference-in-differences analysis using the quasi-experimental setting of financial institution mergers. Overall, our study provides new insights on the role of institutional cross-ownership in the formation of lending relationships.

Common Institutional Ownership and Earnings Management*

ABSTRACTThis study examines the relation between earnings management and block ownership of same‐industry peer firms by a common set of institutional investors (common institutional ownership). This relation is important given the tremendous growth of common institutional ownership and the significant influence of blockholders on financial reporting. We hypothesize that common institutional ownership mitigates earnings management by enhancing institutions' monitoring efficiency and by encouraging institutions to internalize the negative externality of a firm's earnings management on peer firms' investments. Consistent with our hypothesis, we find that higher common institutional ownership is related to less earnings management. Analyses of a quasi‐natural experiment based on financial institution mergers show that this negative relation is unlikely to be driven by the endogeneity of common institutional ownership. Cross‐sectional tests provide evidence that the negative relation is stronger among firms for which common institutional ownership is likely to generate a greater reduction in institutions' information acquisition and processing costs, and among firms whose severe financial misstatements are more likely to distort co‐owned peer firms' investments, supporting both mechanisms underlying our hypothesis. Our findings inform the ongoing debate on the costs and benefits of common institutional ownership by highlighting an important benefit: the enhanced monitoring of financial reporting.

Common Ownership along the Supply Chain and Supplier Innovations

Common owners are the (institutional) investors that hold equities of multiple firms. This paper examines the impact of common ownership of suppliers and customers on suppliers' innovation activities. I find suppliers' investment in innovation, quantity and quality of innovation output increase when common owners control higher fractions of them and their customers. The impact of vertical common ownership on innovation input and quality of innovation output is stronger and more robust than that of horizontal common ownership. I provide plausible evidence for causality using a difference-in-differences approach based on a quasi-natural experiment in the form of financial institution mergers and acquisitions. Moreover, I test the potential channels through which vertical common ownership could influence supplier innovation. My evidence suggests that common ownership increases investment in innovation by mitigating hold-up issues between suppliers and customers, and enhances innovation output performance by improving technological spillovers between suppliers and customers. Overall, my evidence suggests that common institutional ownership enhances suppliers' innovation performance by improving relationships between suppliers and their customers.

Shareholder-Creditor Conflicts and Limits to Arbitrage: Evidence from the Equity Lending Market

We show that conflicts of interests between shareholders and creditors affect limits-to-arbitrage through short-sale constraints. Using mergers of financial institutions as a shock to dual ownership, we show that dual holdings of debt and equity increases equity lending supply and reduces short-sale constraints. Shareholders are also less likely to restrict lending supply before shareholder votes when dual holders are present. Further, dual holdings are associated with faster corrections of mispricing, consistent with lower shareholder-creditor conflicts enhancing market efficiency. Our results suggest that shareholder-creditor conflicts give rise to limits to arbitrage and have a real effect on market efficiency.

Dual Ownership and Risk-taking Incentives in Managerial Compensation

This paper studies how managerial compensation is shaped by the risk preference of shareholders. Firms with a large ownership held by holders'' -- institutional investors that simultaneously hold equity and bonds of the company -- choose a less risk-inducing compensation structure. Exploiting financial institution mergers that create dual holders for portfolio companies, we identify a causal link between dual ownership and CEO compensation policies. Mutual fund proxy voting data suggest that shareholder voting is an important channel for dual holders to implement less convex contracts.

Common Ownership, Common Information Environment?

We examine the influence of common ownership on commonalities in the information environment. Specifically, we study commonalities in financial statements and in the actions of key agents such as financial analysts and firm managers who contribute and respond to the information environment. Using a differences-in-differences research design centered on the mergers of financial institutions, we find that an increase in common ownership leads to increased comparability of financial statements issued by commonly owned firms. An increase in common ownership also leads to higher likelihood of filing restatements, as greater comparability and potentially greater correlation of economic fundamentals uncover inconsistencies, errors and irregularities in reporting, particularly in the presence of shared auditors. In addition, common ownership leads to more shared coverage by financial analysts. Analysts’ earnings expectations become more correlated across peer firms, but analysts are also more likely to revise their expectations when peer firms issue earnings guidance. Finally, we shed light on the real consequences of such changes in the information environment. Managers become more likely to use the information captured in peer firms’ stock price when making investment decisions following an increase in common ownership.

Disclosure incentives when competing firms have common ownership

This paper examines whether common ownership – i.e., instances where investors simultaneously own significant stakes in competing firms – affects voluntary disclosure. We argue that common ownership (i) reduces proprietary cost concerns of disclosure, and (ii) incentivizes firms to “internalize” the externality benefits of their disclosure for co-owned peer firms. Accordingly, we find a positive relation between common ownership and disclosure. Evidence from cross-sectional tests and a quasi-natural experiment based on financial institution mergers help mitigate concerns that our results are explained by an omitted variable bias or reverse causality. Finally, we find that common ownership is associated with increased market liquidity.

Common-Ownership and Portfolio Rebalancing

The empirical literature on the potential collusive effects of common-ownership relies heavily on financial institution mergers to make causal inferences. I find that more than 85% of newly-formed common-ownership relationships due to such financial institution mergers are no longer commonly-held by the acquiring institution during the post-merger period (with most being liquidated in the first quarter following the merger). Firms that are no longer commonly-held by the merged institution drive the anti-competitive results found in previous studies. The fact that portfolio firms are so quickly rebalanced casts doubt on the utility of financial institution mergers as a natural experiment. I also find evidence that portfolio rebalancing post-merger is driven by other factors, such as portfolio diversification or index tracking. Further, I find no significant positive risk-adjusted returns for a common-ownership based portfolio strategy, suggesting that investors do not make a profit from commonly-held stocks. Taken together, these findings suggest that empirical basis for claiming collusive effects of common-ownership is weaker than it appears and there is no strong evidence that provides a basis for policy concerns about institutional common-ownership.