Do universal banks create value? Universal bank affiliation and company performance in Belgium, 1905–1909

Abstract

We investigate the impact of universal banks on the performance and the risk of affiliated companies in an unregulated environment with booming financial markets.For a unique sample of 129 Belgian companies listed in the period 1905-1909, we find that universal bank affiliation had a positive impact on the market-to-book ratio and return-on-assets. The effect on performance was positively related to the degree of bank involvement. Universal banks significantly reduced the volatility of return-onassets. Stock return performance, measured by the Sharpe ratio, was also significantly better for affiliated corporations.

The value of corporate boards during the Great Depression in Belgium

“…Several empirical papers have found a beneficial relationship between having a banker on the board and firm value and liquidity (e.g. pre-World War I evidence from Ramirez 1995 for the U.S.; Becht & Ramírez 2003 for Germany;Van Overfelt et al 2009 for Belgium). Furthermore, bankers can provide valuable financial advice to management and they can signal quality to outside investors, which makes it easier and thus cheaper for firms to attract additional capital (e.g.…”

“…Kroszner & Strahan 2001) and they can mitigate information asymmetries between the bank and its client firm so that the availability of credit is increased and its cost reduced (e.g. Diamond 1984;Ramirez 1995;Becht & Ramírez 2003;Van Overfelt et al 2009). However, a bank that has a representative on the board can also abuse its private information to extract rents from the firm (e.g.…”

“…Our paper provides a unique contribution to the literature by investigating the value of corporate boards during the most important crisis of the 20 th century. It contributes to an extended literature that investigates the value of corporate governance mechanisms during a crisis (Johnson et al 2000;Mitton 2002;Lemmon & Lins 2003;Baek et al 2004;Barton & Waymire 2004;Graham et al 2011;Nguyen et al 2015), but also to a small but growing literature that investigates the value of corporate boards in a historical context (Van Overfelt et al 2009;Campbell & Turner 2011;Graham et al 2011;Braggion & Moore 2012;Foreman-Peck & Hannah 2013).…”

Universal Banking and the Development of Secondary Corporate Debt Markets: Lessons from 1830s Belgium

“…However, the fact that the events of the 1830s resulted in a big market failure does not mean that the methods followed by banks were fundamentally insane. As a matter of fact, the very same methods were applied anew by Belgian universal banks in the following decades, and then met a considerable success in creating new securities markets (Ugolini forthcoming; Van Overfelt et al 2009).…”

The Austrian banking crisis of 1931: a reassessment

“…1998; Kroszner and Rajan 1994; van Overfelt et al . 2009; Puri 1996) may find the analytical approach of this article useful. The study of universal banks in history struggles to locate a good definition of, and a simple measure for, universal banks’ exposure to their Konzern.…”