Universal Banking, Asymmetric Information and the Stock Market

Parantap Basu and Sanjay Banerjee (sanjay.banerji@nottingham.ac.uk)
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Sanjay Banerjee: University of Nottingham

No 2013_07, CEMAP Working Papers from Durham University Business School

Abstract: The paper shows that attempts to sell stocks of borrowing firms by the universal banks upon private information result in: (i) discounting of stock prices, (ii) a higher fraction of ownership in the borrowing firm and a greater loan size, (iii) an increase in consumption risk and precautionary savings of households. Hence, the size of the commercial banking activity increases under asymmetric information at the expense of a higher consumption risk borne by the households. The magnitude of the resulting stock market discount depends crucially on the market ís perception about the relative proportion of lemons in the stock market.

Date: 2013-06
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