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Networking Behind the Scenes: Institutional Cross-Industry Holdings and Information Frictions in Corporate Loans

It is increasingly common that institutional investors simultaneously hold the equity of both industrial firms and financial firms, creating a “bank-firm ownership linkage.” We find that borrowers linked to banks other than their existing lenders through such linkages enjoy significantly lower loan spreads. This finding is mostly driven by institutions transmitting information between portfolio firms and banks, which mitigates information frictions and thereby reduces firms’ borrowing costs. For identification, we adopt a difference-in-differences method based on the quasi-natural experiment of financial institution mergers. Our evidence highlights an underexplored effect of institutions’ cross-industry holdings on the corporate loan market.