The Multiple Roles of Banks in Corporate Finance

銀行在公司金融中的多重角色

Student thesis: Doctoral Thesis

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Award date31 Aug 2021

Abstract

This dissertation is composed of two essays. The first one examines whether banks assist the tax avoidance of their corporate clients when they simultaneously hold both the debt and equity stake of these firms. The second one studies when banks hold a firm’s debt and also serve as indenture trustee of bonds issued by this firm, how this creditor-trustee status affects the debt borrowing of the firm.

The first essay shows that bank dual holding has a causal effect on the tax planning of client firms. Banks have long been criticized by public media and policymakers for helping their clients with tax avoidance (United States Senate, 2005; OECD, 2008, 2009). Despite the high public attention, research on this topic is limited. Gallemore, Gipper, and Maydew (2019 JAR) is the first paper that demonstrates some banks serve as "tax planning intermediaries" and assist corporate clients with tax planning. However, it is not fully understood why some banks are willing to support the tax planning while others may not. We study this issue by focusing on the growing phenomenon that banks can hold both the debt and equity stake of the same firm. We posit that this dual holding status will affect banks’ attitude towards clients’ tax avoidance and motivate them to help their clients with tax avoidance.

We rely on bank mergers as identification. When two banks merge, if one bank holds a firm’s equity and the other bank holds the firm’s debt, this merge makes this firm in a dual holding relationship with the bank. Since bank mergers are not likely driven by one particular firm in their portfolio, bank mergers provide exogenous shocks to firms’ dual holding status. We use a difference-in-differences approach to draw causal inferences. We find that firms significantly increase their tax avoidance when they establish a dual holding relationship with banks. This effect is more pronounced when affected firms have more unexploited tax-saving opportunities; when the dual holding banks have larger shares of equity or loan of the firm; and when the banks have more tax-assisting expertise or proprietary information of borrower's industry. Our results suggest that the rising dual holding status of banks is a reason for banks to facilitate the tax avoidance of their corporate clients.

The second essay investigates banks’ dual role as bond trustees and loan lenders. Public bondholders suffer a collective-action problem and hardly act as a cohesive group to enforce their rights due to the dispersed ownership and investor anonymity. The U.S. Trust Indenture Act (TIA) of 1939 mandates that public-issued corporate bonds must appoint a trustee as a representative of bondholders. These trustees are appointed by issuers, and often have other business relationships with issuers. A typical phenomenon is that a bank occupying the dual position of bond trustee and loan lender of the same firm. Such creditor-trustees give rise to the concern on conflicts of interest, especially when issuers are in financial distress, because the trustee may prioritize its own interest over fiduciary duty. Despite the widely held concern, the Trust Indenture Reform Act (TIRA) in 1990 rules that the creditor-trustees are allowed in general, and only when the bonds are in default, creditor-trustees may be disqualified because of conflict of interest. This essay provides the very first empirical study on the effect of creditor-trustees on corporate bonds.

Using a comprehensive sample of U.S. corporate bonds with trustee information, we find that more than half (54%) of bonds are associated with creditor-trustees. Bonds with creditor-trustees are issued with lower yield spreads and fewer restrictive covenants than bonds without creditor-trustee. This effect is stronger for borrowers subject to more information asymmetry and when creditor-trustee banks hold more proprietary information about the borrowers. We did not find these patterns for other types of relationship trustees. These findings do not support the conflict of interest argument but favor the view that that creditor-trustee helps mitigate information frictions and reduce agency costs through cross-monitoring.