Banks' equity stakes in borrowing firms: A corporate finance approach

Jukka Vauhkonen
Additional contact information
Jukka Vauhkonen: Bank of Finland

Game Theory and Information from University Library of Munich, Germany

Abstract: In most countries, banks’ equity holdings in firms that borrow from then are rather small. In light of the theoretical literature, this is somewhat surprising. For example, according to agency cost models, allowing banks to hold equity would seem to alleviate firms’ asset substitution moral hazard problem associated with debt financing. This idea is formalised in John, John, and Saunders in a model where banks are modeled as passive investors and bank loans are the only source of outside finance for firms. In this paper, we argue that this alleged benefit of banks’ equity holding is small or non-existent when banks are modeled explicitly as active monitors and firms have access also to market finance.

Keywords: banks’ equity holdings; firms’ capital structure; social welfare (search for similar items in EconPapers)
JEL-codes: D82 G32 (search for similar items in EconPapers)
Date: 2004-04-29
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-fin and nep-mfd
Note: Type of Document - pdf
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/game/papers/0404/0404003.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpga:0404003

Access Statistics for this paper

More papers in Game Theory and Information from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ( this e-mail address is bad, please contact ).