Does Bank Equity Differ from Non-Bank Equity? The Effects of Regulatory Restrictions on Bank Ownership

• In Event: Novel Topics in Financial Accounting

Abstract

We document the effects of bank holding company (BHC) requirements on corporate control. We find that distribution of BHC equity ownership shows a larger discontinuity at the 10% ownership level compared to non-financial firms. This result is consistent with a binding constraint arising from “presumption of control” by bank regulators for holders of more than 10% of BHC stock. Consistent with constraints on outside equity control, we find that underperformance of bank shares prior to large stock acquisitions by active investors occurs over a longer interval prior to the 13F filing. Additionally, underperformance of bank shares prior to CEO turnover is significantly worse. These results suggest that regulations constrain corporate-control changes for banks. Our results are consistent with the existence of frictions that increase entrenchment of bank managers. These restriction could increase the cost of non-controlling bank equity ownership.

Authors

• Yadav K Gopalan, Washington University in St. Louis

• Joshua Alan Lee, Florida State University

• Richard Frankel, Washington University in St. Louis