Bank Regulatory Capital Adjustment and Ultimate Ownership Structure : Evidence from European Commercial Banks

We empirically investigate whether a bank's decision to recapitalize is influenced by the separation between voting and cash-flow rights of the ultimate owner. We use a novel dataset on bank ultimate control and ownership structure of 442 European commercial banks to estimate an ownership-augmented capital adjustment model. We find that when the ultimate owner's rights are identical, banks actively and equally adjust their capital upwards (i.e. raise equity) and downwards (i.e. repurchase equity) to reach their target. However, a gap between both rights makes banks reluctant to actively adjust their capital position upwards, presumably because they fear control dilution. Further investigation shows that such a behavior is more pronounced if the ultimate owner is a family or a state, or if the bank is headquartered in a country with weak shareholder protection. Our findings have several policy implications on the road to the final stage of Basel III in 2019