Banks as Stewards

Abstract

Banks play a potentially transformative role in enabling firms to overcome the well-documented frictions that hinder the generation and undertaking of value-creating investments, moving beyond the classic view of banks as mere credit providers. We put forth a conceptual model where  banks steward companies to use informational advantages through industry specialization, thus guiding firms towards long-term investments. The model suggests that the effects of stewardship are most important for firms that face costs related to searching  for undertaking long-term investments on their own, such as those with short-termist shareholders or those facing more severe agency challenges. We test these predictions using administrative credit registry data from U.S. banks and proxy long-term investments as those associated with the energy transition. We find that banks with more specialization in transition lending are more likely to finance projects with long-term payoffs, that they offer lower interest rates for these projects, and that they are particularly effective in helping short-termist firms’ to overcome their obstacles against making such investments. Moreover, firm expansion into new industry subsectors is more likely to be financed by stewardship capable banks with sector expertise the firm lacks.