"Too dispersed to monitor? Ownership dispersion, monitoring and the prediction of bank distress"

This paper conducts an empirical assessment of the theories stating that ownership concentration improves the quality of shareholders' monitoring. In contrast with other studies, we do not use regressions of risk/performance on ownership concentration. Instead, we build an early warning model of bank distress that includes a leading indicator derived from banks' share price, the Merton-KMV distance to default (DD). The significance of this indicator depends on the efficacy of shareholders' monitoring. On a sample of European banks, we show that the predictive power of the DD is satisfactory only when banks' shareholding is characterized by the presence of blockholders.Monitoring; Ownership concentration; Block ownership; Bank distress; Early warning models; Distance to default

Ownership concentration and market discipline in European banking: Good monitoring but bad influence?

We investigate the impact of banks’ ownership concentration on the effectiveness of shareholders’ market discipline. More precisely, we first assess whether the ability of the distance to default to predict banks’ financial distress is affected by the level of ownership concentration (“monitoring” hypothesis). We also assess whether banks’ future financial situation is directly affected by ownership concentration (“influence” hypothesis). Our econometric estimates are conducted on a panel of 77 European banks observed between the first quarter of 1997 and the last quarter of 2005. We find that ownership dispersion reduces the predictive power of the distance to default. The data collected come from three sources: Bankscope, Datastream and Thomson One Banker Ownership. The econometric methodology is based on simple pooled-logit estimates corrected for the clustering effect. Several tests are then conducted to assess the robustness of the results. We also recall that theoretical results do exist to explain why banks’ ownership structure can alter market discipline and the ability of market-derived indicators to predict future financial distresses. This work finally suggests that the empirical literature dealing with market discipline should not focus only on the moral hazard potentially created by bad insurance deposit design, balance sheet opacity or the safety net: the evolution of banks ownership structure might also be an important prudential issue.market discipline; ownership concentration; banks’ risk taking

French connection: interlocking directorates and the ownership-control nexus in an insider governance system

We reveal the non-separation of ownership and control for multiple blockholders in the French insider governance system. We show that overlapping directorships of large listed corporations are explained by their ownership connections. Both large and small stakes, from 20% to 1% of cash-flow rights or voting rights, have high explanatory power. Some shareholdings are control rather than monitoring related. We provide evidence also that cross-ownership allows CEOs to entrench themselves. Finally, we demonstrate that causality goes from ownership to interlocking directorates, for both unilateral stakes and cross-shareholdings