Franchise Value and Bank Risk: A New Perspective with Regulations & Ownership
Using a unique and dynamic panel financial and ownership data of 553 US bank holding companies (BHCs) from 2004 to 2015 we investigate the nexus of risk, competition and regulations from an ownership perspective. We focus on how risk affects the franchise value of US BHCs, we also investigate if ownership structures and capital regulations increase or decrease the franchise value of US BHCs. Our results indicate that the lower the risk the higher is the franchise value of the BHC. Using two categories of ownership we found that higher family ownership translates into lower franchise value as family owners can use their position in the firm and extract benefits at the expense of the other shareholders. The institutional owner has more expertise and would use the knowledge to their advantage by promoting an environment of higher stability. Our results for institutional owners showed that a higher Institutional ownership translated into a higher franchise value for US BHCs. Though maintaining higher capital buffers alone did not have a significant impact on franchise value of BHCs however we observed the moderating effect of capital regulations when coupled with our ownership variables on franchise value of BHC’s. We found that capitalization moderates the negative marginal effect of family ownership and the result is an increase in the franchise value of US BHCs. However, the moderating effect of capitalization in the case of institutional ownership resulted in lower the franchise value of BHCs.
Index Terms - Capital Regulations, Franchise Value, Ownership Structures, BHC Risk.