The beneficial effect of common ownership: Evidence from bank liquidity creation

Joye Khoo, Chen Zheng and Shams Pathan

Journal of Banking & Finance, 2024, vol. 163, issue C

Abstract: We argue a positive association between common ownership and liquidity creation because common ownership increases risk-absorption capacity through higher profit margins, greater equity capital, and improved disclosure quality. Accordingly, we find solid evidence that banks with greater common ownership create 3.56%–4.54% more liquidity. The beneficial effect on liquidity creation is dominant for banks with high risk-absorption capacities, enhanced disclosure quality, low competition, greater long-term shareholdings, and low performance-sensitive managerial incentives, substantiating our theoretical conjectures and establishing five significant channels. Finally, we show that banks have incentive to create more liquidity when they have significant co-ownerships among themselves. Our main findings remain robust to multiple proxies, alternative specifications, and three methods to address endogeneity concerns – difference-in-differences based on the Blackrock–Barclays Global Investors merger in 2009, two-stage least squares analysis with instrumental variables based on Russell 2000 index inclusion, and propensity score matching.

Keywords: Common ownership; Liquidity creation; Disclosure quality; Managerial incentives; Competition (search for similar items in EconPapers)
JEL-codes: D82 G01 G14 G21 G32 G34 G38 L41 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:163:y:2024:i:c:s037842662400089x

DOI: 10.1016/j.jbankfin.2024.107172

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