Institutional Shareholders and Bank Capital |
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| Institution: | 1. Audencia Business School, 8 rue de la Jonelière, 44312 Nantes, France;2. TBS Business School, 1 place Alfonse Jourdain, 31068 Toulouse, France;3. Ghent University, Department of Financial Economics, Sint-Pietersplein 5, 9000 Ghent, Belgium;1. Columbia Business School, 3022 Broadway, Uris Hall 601, New York 10027, NY, United States;2. International Monetary Fund, Research Department, 700 19th St, NW, Washington 20431, DC, United States;1. Columbia University, National Bureau of Economic Research (NBER), United States;2. Utah State University, National Bureau of Economic Research (NBER), United States;3. Federal Reserve Bank of St. Louis, United States;1. NUS Business School, National University of Singapore, Singapore;2. NUS Business School, National University of Singapore, Singapore;3. Hana Institute of Finance, South Korea;1. Fordham University, Bank of Finland and University of Sydney, 45 Columbus Avenue, New York, N.Y. 10023 USA |
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| Abstract: | We examine the relationship between institutional ownership and bank capital. Using a large sample of U.S. banks, we show that banks with greater institutional ownership operate with substantially higher capital ratios. The results are robust to controlling for standard determinants of bank capital structure, including market- and accounting-based risk measures. The results hold both for indexers and non-indexers, indicating that the effect of institutional ownership on bank capital cannot be explained by self-selection. We further address endogeneity concerns using an instrumental variable strategy based on the inclusion of banks in the S&P index. We find supporting evidence that the superior monitoring abilities of institutional investors, which reduce the severity of agency costs, is the main explanation for our results. |
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