UC Berkeley

This dissertation is comprised of two essays in a topic at the intersection of Financial Economics and Industrial Organization. Both analyze the effect of common ownership in the U.S. corporate loan market. In recent years, firms and banks increasingly have institutional investors as shareholders in common. These shareholders receive profits from the interest rates set by the bank, and they also benefit from the firm's profits. I study how such common ownership affects loans, particularly as measured by size and price.

In my first chapter, I illustrate through a simple model the implications of firm and bank common ownership on loans. I then provide new evidence on the rise and extent of common ownership between firms and banks. I outline three trends in institutional investors' holdings of public companies, and I describe how these trends drive firm and bank common ownership. First, the overall holdings of institutional investors have grown ten-fold in the past 20 years in terms of market value. The average fraction of a public company owned by these investors nearly doubled (to almost 60 percent) over the same time period. The second trend is the increasing fraction of firms and banks that are owned by common owners and also have a loan relationship. The percentage of firm shares held by institutional investors that also hold bank shares at the time of loan origination has doubled to nearly 40 percent between 1990 and 2012. Similarly, the percentage of bank shares held by institutional investors that also hold firm shares doubled to nearly 30 percent over the same time span. Third, I find that common owners are persistent in their holdings. Around 90 percent of investors the drive common ownership between firms and banks remain as investors in the subsequent year, both in terms of the number of investors and in terms of the percentage of shares held by these recurring investors.

In my second chapter, I empirically show that when a firm and a bank have common ownership, the firm obtains larger loans from the bank at a lower interest rate. I use the growth of index funds as a source of exogenous variation to estimate a plausibly causal link between common ownership and loan terms not confounded by unobserved factors such as strategic investments by active institutional investors. I find that a one standard deviation increase in common ownership leads to a five basis point interest rate decrease and a three percent loan size increase. I show that these loan terms do not go to underperforming firms but to firms that are less likely to receive a credit rating downgrade. I also find that this improvement in loan terms is more pronounced for smaller and unrated firms. This suggests that the benefits of common ownership may result from decreased information frictions and decreased monitoring frictions for the lender if the lender's shareholders also have access to firm returns and firm information.