Information Flows within Financial Conglomerates:

Evidence from the Banks-Mutual Funds Relationship

Massimo Massa* Zahid Rehman**

First Draft: 10th February, 2005

This Draft: 3rd August, 2005

JEL Classification: G30; G23; G32

Keywords: conflict of interest; mutual funds; banks.

*Massimo Massa, Finance Department, INSEAD, Boulevard de Constance, 77300 Fontainebleau France,
Tel: +33160724481, Fax: +33160724045 Email: massimo.massa@insead.edu.
** Zahid Rehman, Finance Department, INSEAD, Boulevard de Constance, 77300 Fontainebleau
France, Tel: +33160712566, Fax: +33160724045 Email: zahid.rehman@insead.edu.
 Information Flows within Financial Conglomerates:
Evidence from the Banks-Mutual Funds Relationship

Abstract

We investigate the flow of information within financial conglomerates by focusing on the

effect that the lending behavior of affiliated banks has on the portfolio choice of the mutual
funds belonging to the same conglomerate. We entertain two alternative hypotheses: either
mutual funds are used to help the overall policy of the conglomerate of which they are part or
they exploit the privileged inside information available to the affiliated bank. We find
evidence for the latter. We show that the funds of the conglomerate increase their stakes in
the firms that borrow from the affiliated banks in the period following the deal. No analogous
finding is there for the unaffiliated funds. Using net-of-style returns, we show that this
strategy enhances fund performance, on average, by 15 bps per month (1.8% per year) relative
to that of unaffiliated funds in the post-deal era. Funds increase (decrease) their portfolio
weights in those borrowing stocks which subsequently provide positive (negative) abnormal
returns, suggesting that they exploit inside information not available to the market.

JEL Classification: G30; G23; G32

Keywords: conflict of interest; mutual funds; banks.
Introduction

Modern theory views the firm as a communication network that is designed to

minimize both the costs of processing new information and the costs of

communicating this amongst agents. According to Arrow (1985), knowledge and

decision making are dispersed within the agents of the firm and the objective is to

“determine an allocation of information and a set of decision rules for the individual

agents so as to optimize some given payoff function of the firm.”

Ironically, it is this very objective of the firm that has come under great

debate in the recent scandals on Wall Street. Rampant sharing of information

between the different divisions of financial conglomerates all in the name of ‘profit

maximization’ led to conflicts of interests so severe that the interests of investors

were seriously undermined. Elliot Spitzer blamed the information sharing and the

incentive structures in place at investment banks for this debacle implying that the

theory of the firm needs perhaps to be modified in the case of financial firms.

While conflicts of interests between the analyst and the investment banking

divisions of financial conglomerates have been the focus of the financial press, we still

have scarce knowledge of the way in which financial conglomerates exploit the

information generated ‘in-house’ by their trading activities. In particular, is the

information generated by the lending arm used for the purpose of portfolio formation

by the asset management arm, in violation of the Chinese walls? Or are the financial

conglomerates using the asset management arm to support the stock price of

companies to which they are lending or for which they are acting as underwriters?

The goal of this paper is to investigate this issue by focusing on the affiliation of

mutual funds with financial conglomerates which also contain banking and insurance

arms. We analyze how knowledge spillovers from the banking divisions may influence

the investment activities and performance of affiliated mutual funds.

2
 Traditionally, mutual funds have been considered as stand-alone entities.

Recently, the literature has started to consider the implications of family affiliation.

However, many mutual funds not only belong to families of funds, but also to

broader financial conglomerates that also exercise other activities, such as banking

and insurance. In the US alone, approximately 40% of the mutual funds, between

1990 and 2004, belonged to such financial conglomerates. This implies that the

manager of a fund (e.g. ABN Amro Equity Plus Fund) is effectively working for a

broader organization (ABN Amro) whose main interests may not necessarily be

aligned with those of the fund holders.

Affiliation with a financial conglomerate provides these mutual funds with

access to a broader set of resources, better research facilities, lower transaction costs

and distribution externalities. For example, a fund that is part of a financial

conglomerate may use the widespread distribution network of the retail branches of

the affiliated bank (i.e. a bank that is part of the same conglomerate) to sell its

shares, thereby reaching more people at a lower cost. The fund manager may also

have access to the research output of other institutions which are part of the same

conglomerate (i.e. insurance or analyst divisions). In the extreme case, the fund

manager may even be able to use this inside information in his stock picking activity.

That is, a fund manager may exploit the privileged information that its affiliated

bank has in virtue of its lending or underwriting activity to select stocks.

At the same time, however, affiliation with a broad conglomerate may

constrain the fund manger and reduce his freedom to maneuver. The fund manager

may be required to pursue the interests of the group at the expense of those of the

fund holders. For example, fund managers may have to invest in stocks of firms to

which the commercial banking arm of the group is lending or whose issues are being

underwritten by the investment banking division of the group.

3
 Regulators have tried to prevent this “incestuous” behavior by establishing

limits to the flow of information so as to curb the links between the different parts of

the same financial group. In the US, this regulation has taken the form of barriers to

the flow of information between different business units of the same financial

conglomerate — i.e., “Chinese walls”. However, it is not clear how effective this

regulation has been. This debate is now more relevant given the recent repeal of the

provision preventing commercial banks from directly investing in stocks (Glass

Steagall Act).

This paper investigates the flow of information within such financial

conglomerates by focusing on how the investment activity of the funds is related to

the lending activity of the affiliated banks and whether this relationship helps the

funds to deliver superior performance. We consider two alternative hypotheses. The

first hypothesis assumes that mutual funds are used in support of the overall policy

of the financial group of which they are part. For example, a group involved in a

series of lending, underwriting or advisory deals with a firm may want to support the

firm’s stock price around such events. This would be in line with the recent findings

of Ellis, Michaely and O’Hara (2000) who show that on the Nasdaq, market makers

belonging to a financial group support the stock price of those firms whose IPO has

been underwritten by the investment bank belonging to the group.

The alternative hypothesis posits that group affiliation actually helps the

funds belonging to the group. For example, funds may use the inside information

available to the affiliated bank in order to construct their portfolios around the time

of the occurrence of the deal. This would be in the same vein as Irvine, Lipson and

Puckett (2004) who find that institutional investors receive tips regarding the content

of forthcoming analysts’ reports.

Both strategies — i.e., using the funds for price support or helping them

through inside information — may be optimal from the point of view of the group to

4
which the fund belongs. However, the implications for the fund-holders are very

different. Indeed, in the first case, the strategy comes at a cost to the investors in the

funds. In the latter case, instead, the fund holders benefit and the competing funds,

affiliated with other financial groups, stand to lose.

We test these hypotheses by focusing on all the actively managed US equity

funds over the period from January 1993 to June 2004. We obtain data on lending

relationships of banks with firms and merge it with data on mutual fund holdings.

We separate funds belonging to groups which also contain a bank (either a

commercial or an investment bank) from those funds which do not belong to such

groups and test whether the former behave in a way that is different from the latter.

We entertain two alternative hypotheses. The first posits that the goal is to enhance

the performance of the funds of the group by giving them access to the group’s

information (“fund support”). The alternative hypothesis posits that the

conglomerate uses the funds to provide a service to the group (“group support”).

In order to distinguish these two hypotheses we focus on the portfolio decision

of the fund and its ensuing effect on performance. We articulate our tests in three

phases. First, we examine whether the funds change their portfolio weights in the

stocks of the firms with which the affiliated bank has reached a lending deal. That is,

we focus on the date of the initiation of the deal between the affiliated bank and the

borrowing firms and study how mutual funds belonging to the same group change

their portfolio weights in the stocks of these firms around the deal date. In the second

part, we try to assess the impact of these changes in portfolio weights on the

performance of the funds by comparing it to the performance of similar non bank-

affiliated funds which are not changing their portfolio weights on the basis of the

information from lending divisions.

In the third part, we study the performance of the borrowing stocks in the

post-deal period to understand whether the stocks of all the borrowing companies

5
provide abnormal returns or just those stocks in which the mutual funds affiliated

with the lending bank have increased their portfolio weights at the time of the deal.

Trading based on insider information implies that the only stocks providing abnormal

returns should be the ones in which the funds increase their portfolio weights around

the initiation of the lending deal with the affiliated bank. This, in turn, would imply

that the unaffiliated funds would not be able to generate any abnormal return simply

by using the publicly available information on the bank deals.

We provide evidence consistent with the hypothesis that funds benefit from

the use of information coming from the affiliated banks. We find that mutual funds

on average increase their portfolio weights in the stocks of the borrowing firms

around the initiation of the deal between the affiliated banks and these firms. No

analogous result is there for the funds that are not part of the same group. The

occurrence of a deal induces the funds that belong to the same group to increase their

portfolio weights in the stocks of the borrowing firms by approximately 10%. These

findings are economically significant and are robust to different testing

methodologies.

These results support the existence of a coordinated group strategy but do not

reveal its ultimate goal. Indeed, it may be the case that funds increase their portfolio

weights in the stocks of the borrowing firms as part of a strategy of the overall group

that may or may not have any direct impact on their own performance. On the other

hand, it is also possible that the increase in portfolio weights based on inside

information helps these funds to outperform their rival funds. To address these issues,

we look at the effects of fund holdings on the performance of these funds in the

period following the deal. That is, we test whether the funds playing this strategy

improve their performance by comparing their net-of-style returns to those of other

“similar” funds that are not affiliated to banks. “Similarity” is defined in terms of

style, size of the fund, past-year performance of the fund and total assets under

6
management of the family that the fund belongs to. This test, similar to the ones

employed by Chevalier (2000) and Gaspar et al. (2004), allows us to see whether the

effect on performance is indeed a phenomenon related to group affiliation as opposed

to a mere statistical artifact.

We find that group affiliation increases fund performance by approximately

15 basis points per month (equivalent to 1.8% per year) in the post-deal period for

the months in which the funds are holding the stocks of firms to which the affiliated

banks are lending. Moreover, value-weighted portfolios of bank-affiliated mutual

funds out-perform portfolios of their non-affiliated counterparts by as much as 26.4

basis points per month (equivalent to 3.2% per year) in the time period following the

deal initiation. This provides strong evidence in favor of a positive impact of group

affiliation on fund performance and points in the direction of “fund support”

strategies.

We then show that these investment strategies of bank-affiliated funds cannot

be replicated by merely observing the bank lending since all the borrowing firms do

not generate abnormal returns in the post-deal period. Indeed, those borrowing firms

in which bank affiliated mutual funds increase their portfolio weights in the period

after the deal perform significantly better than those borrowing firms in which these

funds decrease their portfolio weights. In particular, using a real time investment

strategy, we show that the stocks in which the affiliated funds increase portfolio

weights outperform the stocks in which the affiliated funds decrease portfolio weights

by up to 1.7% per month. This clearly indicates that the deal itself is not a sufficient

signal of the quality of the borrowing firm and that funds affiliated to banks possess

some privileged information about the borrowing firms which allows them to

discriminate amongst these firms and realize superior performance.

Lastly, we address the issue of fund support strategies in a broader context by

discussing the impact of such strategies for the entire group. We look at the cost of

7
loan provision for the deals where the financial conglomerates lend to their own

divisions to analyze whether mutual funds can use these channels to remit profits

back to their lending divisions by borrowing from them at higher rates. Contrary to

our expectations, we find that these financial conglomerates provide loans to their

asset management divisions at substantially lower rates than the average prevailing

rates for other financial borrowers. We deem this as another form of a fund support

strategy.

Our work contributes to the literature on financial intermediation and the

theory of the firm in general and to that on mutual funds in particular. We link to

four main strands of literature. The first deals with financial intermediation. This

literature has focused on the differences and implications of bank-based systems as

opposed to market-based systems (e.g., Allen and Gale, 1995) and deals with the

normative and regulatory implications of the conflicts of interest arising from the fact

that the financial conglomerate carries out different activities under the same roof.

Chinese walls and functional specialization have been advocated as solutions to this

problem. We contribute to this literature by showing that these regulations may not

be effective and that there is a flow of information within the financial group.

However, unlike what has been argued by the financial press, the goal is not so much

to support the stock price of a firm as it is the exploitation of information arising

from the lending activity.

The second strand of literature is related to the economics of mutual fund

families. Nanda et al. (2003) document the positive spillover that a ‘star’ fund

provides to all the funds belonging to the same family and the strategies played by

the families to generate star funds. Massa (2003) links industry structure to fund

behavior and explains a part of fund performance in terms of the family strategy of

fund proliferation and product differentiation. Khorana and Servaes (1999) study the

determinants of mutual fund starts, showing the factors that induce families to set up

8
new funds. Mamaysky and Spiegel (2002) provide a first equilibrium model of the

mutual fund industry, arguing that families generate funds to allow investors to

overcome their hedging needs. More recently, Guedj and Papastaikoudi (2004) show

that performance persists at the family level, especially in the case of large fund

families, suggesting that families purposefully allocate resources across funds in an

unequal way, while Gaspar et al. (2004) provide evidence of cross-fund subsidization

at the family level. We contribute to this literature by broadening the analysis and

considering the overall financial organization that the mutual fund family may be

part of. We show that the agency problem is not limited to fund activities within the

fund family but is also relevant as far as the existence of other entities within the

same financial group is concerned.

The third strand of literature relates to informed ownership and quality of

corporate governance. This literature has focused on the trade-off between liquidity

and insider ownership. For example, Bhide (1993), Coffee (1991) and more recently

Maug (1998), Kahn and Winton (1998), Bolton and Von Thadden (1998a, 1998b)

and Noe (2002) show how the benefits of concentrated shareholdings are

counterbalanced by the costs that this entails in terms of market liquidity. Bigger

blockholding helps corporate governance by providing better monitoring, but stifles

liquidity. We argue that the same phenomenon may prevail in situations where the

lending bank is part of a financial conglomerate which also contains mutual funds.

Although the monitoring role of banks has been widely advocated, yet, if banks are

able to use their affiliated funds to trade in the stocks of firms to which they are

lending, the positive monitoring effect may be offset by the cost imposed by this

activity on the liquidity of the firms’'stocks.

Our work also contributes to the extant literature on firm boundaries. The

literature in this area, to date, has mainly focused on the determinants of firm

boundaries and relatively little research has gone into how these boundaries affect the

9
allocation of resources (e.g., Mullainathan and Scharfstein, 2001). Moreover, amongst

the determinants of firm boundaries, the role of information transmission between

different firm divisions has received little attention (e.g., Holmstrom and Roberts,

1998). In fact, Arrow (1975) has been one of the few to discuss how information

transmission may be facilitated by vertical integration.

Our results suggest that information flows are an important determinant of

firm boundaries. Indeed, one of the main reasons for housing commercial/investment

banks as well as mutual funds under the same roof could be to facilitate this very

transmission of information. Moreover, the significant tilt that bank affiliated funds

exhibit towards the stocks of firms which are borrowing from affiliated banks

delineates how the allocation of resources within these entities differs from that

within their comparable non-bank affiliated counterparts.

It follows that our evidence also has an important normative dimension.

There has been a hot debate about the best way of preventing conflicts of interests in

the financial industry. Recent scandals (e.g. the dealings of Citicorp and JP Morgan

Chase with Enron) have brought these issues to the forefront once more. The

standard solution in the Anglo-Saxon world has been the adoption of “Chinese walls”

that should separate the activities of different entities within the same financial

group.1 The trade-off, in general, has been between the prevention of conflicts of

interest and the permission for firms to exploit the synergies that affiliation with a

conglomerate may entail. Unlike the recent investigations into “market timing” and

“late trading”, our evidence shows that mutual fund investors may actually benefit

from affiliation with a big group.

The problem in case of the bank-mutual fund relationship is, therefore, not to

protect the mutual fund investors, but to ensure a fair and level playing field in the

1
The recent debates regarding a ban on direct payments by the investment side to analysts and
restrictions on issuing recommendations on a securities offering managed in-house point towards
extensive ‘holes’ in the Chinese walls between banks’ research and corporate finance arms.

10
financial market. Indeed, our evidence points more in the direction of insider trading,

i.e., situations in which some investors exploit their superior information and trade

upon it. While this may benefit some mutual fund investors, it may have negative

implications not only for the firms borrowing from the financial conglomerates but

also for the overall market.2 The former will bear the negative impact of the resulting

information asymmetry on their stock’s liquidity.

The remainder of the paper is organized as follows. In Section 1, we outline

our hypotheses. In Section 2, we describe the data and the construction of the main

variables. In Section 3, we provide evidence of the impact of the lending activities of

banks on portfolio weights of affiliated funds. In Section 4, we study how this affects

the performance of the funds. Section 5 investigates the role of insider information in

more depth by studying the post-deal performance of the borrowing firms. Section 6

provides some preliminary evidence on loan cost differentials as yet another form of a

fund support strategy. A brief conclusion follows.

1. Hypotheses

Banks, by virtue of their lending positions, possess unique information about a firm

and its future prospects. It is likely that this information could be available to

mutual funds belonging to the same group and that it could influence their stock

picking activities.

We define as “bank funds” those mutual funds that are affiliated to a

financial group that also contains a bank (e.g., ABN Amro Funds).3 We define as

“control funds” the funds that are not part of a group containing a bank (e.g.,

Fidelity Funds) and which are similar to the bank funds in terms of investment

2
Bhattacharya and Spiegel (1991), for example, analyze the occurrence of a market breakdown in the
trading system due to the refusal of outsiders to trade with the insiders because of their superior
information.
3
In order to make the identification feasible, we also impose the additional requirement that the family
should hold the stock of the borrowing firm for at least one quarter (from the 13-F Institutional
Investors database) in years -2 to +5 surrounding the initiation of the deal (where 0 represents the year
of the deal’s initiation).

11
objective, size, total assets under family management and past performance. In case

of a flow of information between the bank funds and their affiliated banks, we would

expect to see that the stock holdings of bank funds in firms borrowing from affiliated

banks would differ systematically from those of control funds around the time in

which the deal between the firm and the affiliated banks is taking place.

Our first goal, therefore, is to see how affiliation with a financial group that

also contains a bank affects funds’ holding behavior before and after the loan

announcements. This allows us to posit our first hypothesis:

H1: The funds of the group coordinate their actions with the lending activity of the

affiliated bank.

Under this hypothesis, the funds of the group choose their portfolios in

coordination with the lending activity of the affiliated bank. Both in case of group

support as well as in that of fund support, we expect the funds to increase their

portfolio weights in the stock of the firms to which the affiliated banks are lending. In

particular, we expect this increase in portfolio weights to take place around the time

in which the lending deal is being finalized. That is, bank funds should have higher

portfolio weights in the stocks of the borrowing firms after the deal initiation date

than before it. We would also expect them to exhibit higher portfolio weights in these

stocks in comparison to their respective control funds. The alternative hypothesis is

the absence of a group strategy. In this case, fund holdings should not change around

the deal’s initiation.

The natural next step is to ask whether such coordination is done in order to

improve the performance of the bank funds or to boost the price of the borrowing

firms’ stocks. To address this issue, we study the performance of bank funds in the

period following the deal’s initiation relative to that of their control funds. Under the

former scenario (i.e. “fund support”) we should observe a superior performance of the

12
bank funds in the post-deal period relative to their controls. Funds exploit the

privileged information that the affiliated bank acquires due to its lending activity and

tilt their portfolios towards the stocks of firms borrowing from the affiliated bank

thereby outperforming their controls. This allows us to propose the following

hypothesis:

H2a: The performance of bank funds, relative to that of the control funds, improves

as a result of the portfolio reallocation following the lending activity of the affiliated

bank.

Under the latter scenario (i.e. “group support”), the funds are used by the

group to support the prices of the stocks of the firms to which an affiliated bank has

either lent, or for which it has underwritten a deal. In this case, we expect that the

performance of the bank funds that tilt their portfolios towards the stocks of firms

borrowing from affiliated banks would be either adversely affected or not affected at

all. This allows us to put forward the following hypothesis:

H2b: The performance of bank funds, relative to that of the control funds, either

deteriorates or is unaffected as a result of the portfolio reallocation following the

lending activity of the affiliated bank.

If the coordination in investment is carried out to boost the bank funds’

performance, it is essential that the information about the quality of the borrowing

firm not be revealed to the market just by the announcement of the deal itself.

Otherwise, it would also be possible for the non bank-affiliated funds to increase their

holdings in the borrowing firms’ stocks. This would hinder the ability of the bank

funds to outperform. Therefore, for the strategy to be feasible, bank funds should

increase their portfolio weights in only a subset of the borrowing firms — i.e., the

“winner” stocks — and decrease their weights in others — i.e., the “loser” stocks.

13
Hence, in the case of transfer of inside information within the conglomerate, we

expect:

H3: The stocks in which the bank funds increase their positions after the deal

outperform those in which they reduce their positions.

Under this hypothesis, other investors in the market cannot replicate the

investment strategy of the bank funds and hence it is possible for the bank funds to

consistently outperform their non bank rival funds in periods following the lending

deal’s initiation. The overperformance can therefore be justified in terms of inside

information only available to the lending arm of the conglomerate. Before proceeding

to the tests, we describe the data.

2. Data and Construction of Main Variables

The data has been obtained from three sources: CRSP Mutual Funds Database, for

data on mutual fund characteristics, Spectrum Mutual Funds, for data on fund

holdings, and the Loan Pricing Corporation (LPC) Dealscan database, for data on

lending relationships between banks and firms. The LPC database is a comprehensive

international dataset which contains detailed information relating to the start and

expiration dates of loan deals along with the names of the lending banks, loan

amounts, terms and conditions of the loans and their associated costs. For the

purposes of this study, we focus only on the deals where the borrowing firms are

based in the North American region and where the deal has been completed and

confirmed to occur by LPC’s data sources.

LPC recognizes firms by their ticker symbols and banks by their names. In

order to make this information compatible with other databases used in this study,

we merge ticker symbols for each firm with their historical CUSIPS and use a name-

matching algorithm to match the name of each lending bank with that of a mutual

14
fund family using Spectrum 13-F Institutional Investor data.4 Since Spectrum 13-F

data can contain the name of the same fund family under different institutional

investor categories, we match the name of the lending banks separately to each of the

5 categories of institutional investors to ensure that all 5 categories are covered.

After matching the names of the lending banks to those of the institutional

managers, we match the names of each institutional manager in the Spectrum 13-F

database, using an “eye-match” with the name of a management firm from the CRSP

Mutual Funds database. By this process, we are able to identify all the individual

mutual funds which belong to each of the institutional managers.5 In order to identify

the stock holdings of each of these mutual funds, this dataset is then matched with

the Spectrum Mutual Fund Holdings database (Wermers, 2000). Appendix A

provides a detailed description as to how this merge is performed.

In addition, this merge also enables us to identify multiple classes of the same

mutual fund in the CRSP database. We collapse multiple classes of the same fund

into a single fund by taking the TNA (total net assets) weighted average of the

individual class characteristics. The TNA of the fund itself is the sum of the TNAs of

the individual classes which belong to the fund. Our final dataset, therefore, contains

information on the starting date of each loan transaction (known as the deal active

date in the LPC database) along with identifications of the borrowing firms and their

lead lending banks, as well as the holdings and characteristics of the bank funds.

Our focus is on deals which may signal new information to the mutual funds.

In order to ensure this, we impose the criterion that for a deal to be eligible for

consideration in our sample, no other deal between a bank belonging to the same

fund family (taken from 13-F Institutional Investors) and the same firm should have

4
Apart from the constraint that the borrowing firm be located in the North American region and that
the deal should be confirmed, we use the entire universe of deals reported in the LPC database as long
as the ticker symbol for the borrowing corporation is available and the lead bank(s) responsible for
arranging the deal can be identified.
5
At this stage of the merge we also account for those “in house” relationships where companies may be
affiliated (share some fractional ownership) even without sharing the same family name. For example,
Mellon Bank is merged with Dreyfus Corporation since Dreyfus is the asset management arm of Mellon.

15
taken place in the previous five years. This criterion enables us to avoid issues of long

term relationships between firms and banks where a new deal may not be a signal of

new information but could just be a continuation of an existing relationship.

Next, we impose the standard criteria that funds must be at least more than

one year of age and have more than $1 million of assets under management to ensure

that we deal with representative funds. Also, in order to focus exclusively on stock

funds, we impose the criteria that stocks must comprise more than 85% of the funds’

portfolio while bonds should comprise no more than 2% (thereby excluding

approximately the top 2.5% of funds ranked in terms of bond holdings, after the

imposition of the above-mentioned criteria). We perform all our tests separately on

“All Categories” of mutual funds which survive the imposition of these criteria

(where a category is defined in terms of the CRSP ICDI Objective Code) as well as

on subsets of this dataset based on the 5 ICDI Objective categories most likely to

contain stock funds. These categories are aggressive growth (AG), balanced (BL),

growth and income (GI), long-term growth (LG) and total return (TR).

The time period for our study ranges from January 1993 to June 2004. Over

this period, the imposition of these criteria yields 13,154 fund-stock-quarter

observations in the “All Categories” group, for which data is non-missing on each of

the key variables that are used in subsequent analyses.6,7 We provide detailed

definitions of the main variables used in the remainder of this study in Appendix B

and summary statistics for each of these variables in Table 1.

Panel B of Table 1 provides an idea of the number of distinct players which

are involved in this sample. For example, in the category of “stock funds” with size

(measured by TNA) greater than $50 million, our sample contains information on

6
Although LPC data is available from 1987 onwards, our sample starts only from January 1993 due to
the fact that the investment objective codes of mutual funds in the CRSP Mutual Funds Database are
only available from this year onwards till March 2003. Beyond March 2003, we assume that the
investment objective codes for the funds being used in the analysis remain unchanged.
7
We also exclude all financial firms and utilities from our analysis.

16
1,182 distinct deals involving 261 distinct bank funds which, in the 4 years centered

around the deal initiation date, hold the stock of a firm to which their affiliated bank

is lending. These funds belong to 36 distinct families, while the number of distinct

borrowing firms (i.e. “stocks”) which are involved is 858.

To analyze the portfolio weight of the borrowing firms’ stocks, we compute

the Fraction variable. This is the percentage (out of the total assets of the fund at

any point in time) invested in the stock of the firm borrowing from the affiliated

bank.8 The average Fraction in our sample is 0.73%. In dollar terms, this means that

bank funds, on average, invest up to $3 million in the holdings of each firm that is

borrowing from their affiliated bank.9 We also compute the Cumulative Fraction as

the sum of the Fraction variable for a particular fund at a particular time. This

represents the percentage of the assets of a fund invested in all the firms borrowing

from the affiliated bank.10 From Table 1, Panel A, we can see that in our sample, on

average, the percentage of the mutual funds’ assets invested in stocks of firms to

which their affiliated banks are lending during years 0 to +2, (where 0 represents the

time of the initiation of the deal) is 6.91%. In dollar terms, this represents an

investment of approximately $28.3 million in the stocks of companies with which the

affiliated banks have a lending relationship.11

We can now proceed to test whether bank funds change their portfolio

weights in the borrowing firms’ stocks in an appreciable way around the deal

initiation date.

8
This approach is similar to the one employed by Brunnermeier and Nagel (2004).
9
This figure was calculated by multiplying the average Fraction from Table 1A by the median TNA for
mutual funds taken from Table 1A which is $410 million.
10
For the purpose of computing the Cumulative Fraction, we consider only the stock holdings of the
borrowing firms which are observed within two years of the deal initiation date for the respective deal.
The Cumulative Fraction variable is defined at the fund-month level but the drop in the number of
observations, in comparison to the fund-stock-quarter level observations, occurs because we are
collapsing the holdings of different stocks at the same point in time into one data point for any
particular fund. Also, as mentioned above, in constructing this variable, we only focus on the time
period after the deal.
11
Once again this figure was calculated using the median TNA for mutual funds taken from Table 1A
which is $410 million.

17
3. The Effect of Bank Lending Relationships on Fund Holdings

We start by testing whether bank funds change their portfolio weights in the stocks

of firms borrowing from an affiliated bank in the wake of the deal (i.e., H1). As

mentioned above, we compute the Fraction variable for the years -2 to +2, centered

around the deal announcement date for each individual stock/deal and test how this

variable changes around the deal announcement date. In doing so, we implicitly

assume that the bank funds do not have any information about the occurrence of the

deal until the deal initiation date and that they receive this information right at the

time of the deal initiation date. The fact that it might be possible for bank funds to

have some prior information about the deal before its actual initiation should only

bias the test against us finding any significant result. We conduct both univariate

and multivariate tests to assess the impact of bank lending relationships on portfolio

weights and describe the results of each, in turn, below.

3.1 Univariate Tests

Table 2 reports the results of univariate tests on the changes of portfolio weights of

bank funds in the stocks of firms borrowing from affiliated banks. We conduct these

tests for “All Categories” of funds as well as for “Stock Funds”. Further, within the

category of stock funds, we report results for bank funds with TNAs greater than $1

million, $15 million and $50 million. This is done to check whether our results are

being driven by very small funds.

The results show that the start of the deal has a statistically and economically

significant impact on the portfolio weights of the bank funds in the stocks of

borrowing firms. If we consider the Mean Fraction, after the initiation of the deal,

bank funds increase their portfolio weights in the borrowing firms’ stocks, on average,

by 10%. The t-tests for the significance of this change are highly significant across all

the different specifications and panels. Furthermore, in order to ensure that these

18
results are not driven by some outliers, we also look at the change in Median

Fraction, where the results are even starker. For the case of “All Categories,” the

change in Median Fraction is 21.38%. Both the two-sample Median and Wilcoxon

tests confirm that this change is highly statistically significant. For “Stock Funds,”

the change in Median Fraction is around 15.6% and is statistically significant for all

the three size groups.

In order to ensure that the increase in Fraction around the deal date is not

being driven by mere changes in the stock price of the borrowing firms, we compute

an Adjusted Fraction variable. In this case, the market value of the holding of the

borrowing firm’s stock is computed using the earliest stock price available in the (-2,

+2) year window around the deal date for which a mutual fund is seen to hold the

stock of the borrowing firm. We report the results of univariate tests conducted using

this measure in Table 3. The results clearly show that the change in both the Mean

Fraction and Median Fraction are highly economically and statistically significant

even if we use constant share prices. In fact, the magnitude of the increase in

portfolio weights around the deal date is now greater than before as Mean Fraction

increases by approximately 20% around the deal date. On the whole, this shows that

our univariate results are robust to the use of different portfolio weights.

Univariate tests, however, do not control for other fund characteristics, which

could potentially explain these changes in portfolio weights. We, therefore, focus our

attention next on multivariate tests.

3.2 Multivariate Tests

Bank-fund estimates

We start by conducting the following pooled regression for the bank funds

Fraction Bf ,i ,t = α + βD f ,i + Controls f ,t + ε f ,i ,t (1)

19
where Fraction Bf ,i ,t is the Fraction for bank (B) fund f involving the ith firm at time t

and Df,i represents the Post Deal Dummy for fund f and firm i. This dummy takes a

value of 0 in years -2 to 0 before the start of the deal and takes a value of 1 in years

0 to +2 after the start of the deal which took place between the affiliated bank of

fund f and firm i. The set of control variables include the Lagged Annual Return of

the fund, the Total Net Assets of the fund, the Size of Fund Family, the Turnover,

the Total Fees and the Assets Under Family Management each of which are defined

in Appendix B.12,13 In addition, each regression also contains Style Dummies, defined

for each different ICDI Objective Code given in CRSP. According to hypothesis H1,

we expect β >0, that is, bank funds increase their portfolio weights in the stocks of

the firms to which their affiliated banks lend after the initiation of the deal.

The results are reported in Table 4, Panel A. We consider alternative

specifications involving “All Categories” and “Stock Funds” and, within the category

of stock funds, specifications for funds with TNA greater than $1, $15 and $50

million. Moreover, we also report results with standard errors clustered at the fund

level. The results confirm the findings of the univariate tests. Bank funds increase the

portfolio weights in the stocks of the firms borrowing from their affiliated banks in

the time period following the deal. The results are robust across specifications and are

also economically significant. For example, considering column (2) of Table 4, Panel

A, we see that Fraction increases on average by 10.7% in the period following the

deal initiation. This result is consistent with those documented in Table 2.14

12
Note that since the time period in the regressions has been defined at the quarterly level, for all
variables apart from Lagged Annual Return, we take end-of-quarter values. For Lagged Annual Return
itself, we take the annual return of the fund for the year immediately preceding the end of quarter.
13
Note that in order to break the high correlation between Assets Under Family Management and Size
of Fund Family, we regress Size of Fund Family on Assets Under Family Management and then take the
residual of this regression as the Size of Fund Family variable, thereby orthogonalizing the two
variables. All our results remain practically unchanged if we perform the orthogonalization in the other
way, i.e. by regressing Assets Under Family Management on Size of Fund Family and taking the
residual from there as the Assets Under Family Management variable. These results are available upon
request.
14
The coefficient of the Post Deal Dummy is 0.078% from column (2) of Table 4A. Given that the mean
Fraction variable is around 0.73% from Table 1A, this constitutes an increase of approximately 10.7% in
the holdings of the stock of each firm which is borrowing from an affiliated bank.

20
 It is also worth pointing out that the increase in Fraction turns out to be

more significant for smaller fund families, as can be seen from the negative signs on

the Size of Fund Family and Assets Under Family Management variables. Moreover,

funds which have had a lower annual return (measured by Lag Annual Return) in

the previous year are more likely to increase their holdings by a greater amount.

Lastly, the increase in holdings also seem to be positively linked to the Total Fees

charged by the fund.15

To ensure that our results are not driven solely by changes in the share price

of the borrowing firms, we re-estimate equation (1) using the Adjusted Fraction

variable. The results are reported in Table 4, Panel B, for the same specifications as

the ones used in Table 4A. The results, robust to the use of different portfolio

weights, show that there is a marked increase in Adjusted Fraction around the deal

initiation date. This shows that bank funds increase their portfolio weights in the

stocks of the borrowing firms in the post-deal period.

Controlling for non-bank funds

One possible criticism of this analysis is the lack of control for other market effects. It

is indeed possible that other factors affect the funds’ decision to invest in the stock,

regardless of concurrent affiliated loans. A similar problem has been uncovered in

empirical corporate finance (Chevalier, 2000) as well as more recently in the mutual

fund literature (Gaspar et al. 2004). Even if this is unlikely, still we address it by

using a more robust test. We consider two types of funds: bank-affiliated funds “B”

and “similar” unaffiliated control funds “C”. We then test whether, at the time the

affiliated loan is extended to firm i, there is a statistical difference between the

15
In additional (unreported) tests, we also check whether the increase in portfolio weights around the
deal date is robust to the use of different event windows. We specifically consider event windows of (-1,
+1) and (-1/2, +1/2) years around the deal date and find that all our holdings results (both univariate
and multivariate) are robust to the use of these event windows. These results are available upon request.

21
change in the portfolio weights of firm i’s stock by the affiliated fund B, versus the

change in portfolio weights over the same period by the unaffiliated fund C.

To implement this test, for each fund, B, we identify up to five similar funds,

C. That is, we find other funds that have analogous characteristics but are not part

of a bank-affiliated group. The selection of the control funds is done through very

stringent criteria. The control funds must belong to the same category as the bank

funds and must be similar to the bank funds in terms of size (measured by TNA),

total assets under family management (measured by the sum of the TNA of all the

funds belonging to the family) and fund performance over the previous year.16 In this

manner, up to five control funds are chosen for each bank fund in each year.

After identifying the set of control funds, we first conduct a preliminary test

to check whether the portfolio weights of the control funds themselves change around

the deal initiation date. The date itself is taken from the bank fund to which the

control funds have been matched. We estimate the following equation for the entire

set of control funds:

FractionCf ,i ,t = α + βD f ,i + Controls f ,t + ε f ,i ,t (2)

where the variables are defined as in equation (1). The Fraction variable is taken to

be zero in case the control fund in question is not holding the stock of the firm to

which the affiliated bank of the bank fund is lending.

The results are reported in Table 4, Panel C. We use the same specifications

as in Panel A of Table 4, including style dummies for each CRSP ICDI Investment

Objective and with or without clustering at the fund level. As expected, there is no

discernible change in Fraction for the control funds around the deal initiation date.

16
More specifically, to be chosen as a control fund, the fund must belong to the same CRSP ICDI
Objective code as the bank fund and must have the smallest absolute percentage difference (computed
as the sum of the absolute percentage differences) for fund size, total assets under family management
and fund return over the previous year, with respect to the bank fund.

22
That is, these funds are not changing the portfolio weights of the stocks of those

firms to which the affiliated banks of the bank funds are lending.

Next, we proceed to a joint estimation of the changes in portfolio weights for

bank funds and their respective controls by effectively stacking the bank and control

funds data and running the following regression:

Fraction f ,i ,t = α + β (D f ,i × A f ) + Controls f ,t + ε f ,i ,t (3)

where Df,i represents the Post Deal Dummy for fund f and firm i, and A f is an

Affiliation Dummy which takes a value of 1 only for the bank-affiliated funds and 0

for the control funds. In this specification, through the Deal-Affiliation-Interaction

term, we are able to capture the change in the portfolio weights of bank funds with

respect not only to their portfolio weights in the period before the deal but also to

those of their controls before and after the deal. The rest of the variables are defined

in a way similar to that in equations (1) and (2) above.

The results are reported in Table 5. In Panels A and B, we report the results

for pooled specifications using either 1 or 5 control funds per bank fund. The

specifications are the same as the ones used before. The results show that the Deal-

Affiliation-Interaction variable is highly positively significant, suggesting that the

increase in Fraction by bank funds is significant with respect to both the portfolio

weights of bank funds prior to the deal and to those of control funds before and after

the deal. The result is equally powerful whether we compare a bank fund to its

closest control fund or whether we compare it to the set of five closest control funds.

The increase in portfolio weights is not only statistically but also economically

significant. Around the time of the deal, bank fund portfolio weights increase both in

absolute terms, in comparison to their pre-deal levels, as well as in relative terms, in

comparison to the levels of their respective control funds, The increase is

approximately 0.45%. Given that the mean Fraction for bank funds before the deal

23
and for the control funds is 0.20%, this constitutes an average 225% increase in

Fraction for bank funds at the time of the deal, in comparison to their holdings

before the deal and to those of control funds before and after the deal.

As a further robustness check, we also run Fama-Macbeth (1973) regressions

on the stacked datasets comprising 1 or 5 controls. That is, we estimate a series of

cross-sectional regressions for each quarter, obtain a time-series of the coefficients for

each of the variables and then conduct t-tests of significance to check whether these

differ significantly from zero or not. The results are reported in Panels C and D of

Table 5. The panels display the means of each time series as well as the t-tests. The

results are consistent with the previous ones. After the deal, on average, Fraction

increases by around 225% for bank funds, in comparison to their own portfolio

weights before the deal and to those of control funds before and after the deal.

Finally, in order to control for the difference in the overall level of portfolio

weights between the groups of bank funds and control funds we also estimate the

following variation of equation (3):

Fraction f ,i ,t = α + β (D f ,i × A f ) + γA f + Controls f ,t + ε f ,i ,t (4)

where the Affiliation Dummy (Af) has been included as a separate control on the

right hand side. This enables us to check how the portfolio weights of bank funds

increase at the time of the deal initiation while controlling for the overall difference in

portfolio weights which might exist between the two groups.17

The results are shown in Table 6. Panels A and B report the results using 1

and 5 control fund(s) for each bank fund respectively. In both panels, we see that the

Deal Affiliation Interaction is highly positive and significant for “All Categories” as

well as for “Stock Funds” across all the different size specifications. The results are

robust to the use of clustered standard errors. In terms of economic significance, bank

17
We do not include the Post-Deal Dummy in equation (4) due to the high degree of multicollinearity
between this variable, the interaction term and the Affiliation Dummy.

24
funds increase Fraction by approximately 10% around the deal announcement date,

in comparison to their own holdings in the period before the deal. In addition, the

fact that the Affiliation Dummy itself is also highly positive suggests that bank

affiliated funds, on the whole, hold larger quantities of stocks of firms borrowing from

their affiliated banks.

All these results consistently show that bank-affiliated funds react to the loan

deals that are clinched by their affiliated banks, and increase their portfolio weights

in the stocks of the firms which are borrowing from these banks. This points in the

direction of some coordination within the financial group. Whether the fund holders

stand to gain from this strategy or not is the topic of the next section.

4. The Effect of Bank Lending Relationships on Fund Performance

In this section we analyze whether bank funds exploit the flow of information

generated by their affiliated banks as a result of their lending activities to generate

superior performance (i.e., H2a versus H2b). We take a two-pronged approach. First,

we conduct multivariate regressions of “net of style” fund returns on a Bank Fund

Dummy and other control variables. Second, we construct a calendar time trading

strategy which goes long in bank funds and short in their control funds. We describe

each of these in turn below.

4.1 “Net of Style” Multivariate Regressions

We start by defining the sample. We impose the constraint that each bank fund must

hold the stock of the firm which is borrowing from the affiliated bank for at least 2

quarters in the post deal period and focus on the two year window following the deal

initiation.18

18
That is, we focus exclusively on those stock holdings which are observed in the period after the deal
initiation date.

25
 Given that fund holdings are available only at a quarterly frequency, if a fund

reports to have held a stock at the end of a certain quarter, we assume that the fund

had been holding that stock for all the months within that quarter. We compute the

Cumulative Fraction variable as described in Section 2 and Appendix B. This

variable captures the total portfolio weight that a bank fund puts on the stocks to

which affiliated banks are lending.19 We perform the analysis at the fund-month level

for each of the months which fall under each quarter.

As we mentioned before, our benchmark is the group of control funds which

has been selected through the process described in Section 3 above. We match each

fund-month observation from the bank fund sample with fund month observations

from the control fund sample using 1 or 5 control funds per bank fund. Bank and

control funds observations are stacked. The Bank Fund Dummy takes a value of 1 for

each of the bank funds and takes a value of 0 for the control funds. This allows us to

directly quantify the performance effect due to group affiliation.

We start by computing monthly “Net of Style” returns for each bank and

control fund in the post-deal period. This is done by simply subtracting the average

monthly return of the CRSP ICDI Investment Objective Category, to which the fund

belongs, from the monthly fund return. We then estimate the following multivariate

regression of net of style fund returns on the Bank Fund Dummy and a set of control

variables:

R f ,t = α + βD + Controls f ,t + ε f ,t (5)

where R f ,t represents net of style fund returns for fund f in month t and D represents

the Bank Fund Dummy. The main set of control variables includes the Total Net

Assets of the fund, the Size of Fund Family, the Turnover, the Total Fees and the

19
We smooth this variable by interpolating the value for a quarter in which Cumulative Fraction is zero,
provided that the quarters immediately before and after have non-zero Cumulative Fraction. Nothing is
done if Cumulative Fraction is zero for 2 consecutive quarters. We focus only on those quarters where
Cumulative Fraction is non-zero following this smoothing procedure.

26
Assets Under Family Management, each of which are defined in Appendix B. In

addition, we also control for the 3 Fama-French (1993) factors and the Carhart

(1997) momentum factor.

Following Chen, Hong, Huang and Kubik (2004) and Elton, Gruber and Blake

(2000) we only focus our analysis on funds which have more than $15 million of

assets under management. In addition, we construct a Small Fund Interaction control

variable which is the product of a fund size dummy that takes a value of 1 for funds

with size less than $50 million and zero otherwise and the Bank Fund Dummy. We

also construct a Large Fund Interaction control which is the product of a fund size

dummy that takes a value of 1 for funds with sizes greater than $2 billion and zero

otherwise and the Bank Fund Dummy. “Small” and “large” funds constitute

approximately 5% of our sample each. By using interactions for these sub-samples,

we ensure that our results are not being driven by very small or very large funds. In

addition, by doing so, we also take care of the added concern that information flows

from affiliated banks may not be able to influence the returns of very large funds in a

discernible manner. We focus on “Stock Funds” only.

Under hypothesis H2a, we expect β >0. That is, the performance of bank

funds should improve as a function of the investment in the stocks of firms borrowing

from the affiliated bank. Under hypothesis H2b, instead, β ≤ 0 and bank funds’

performance should not improve as a function of the investment in the stocks of firms

borrowing from the affiliated bank.

We report the results in Table 7, Panels A, B, C and D. In Panel A, we use

one control fund per bank fund and also include small funds, i.e. funds with TNA

smaller than $50 million. In alternative specifications we control for the Fama-French

(1993) and Carhart (1997) factors and report results for both clustered and non-

clustered standard errors. The results are robust through all the different

specifications and support hypothesis H2a. The performance of bank funds improves

27
as a function of the investment in the stocks of firms borrowing from the affiliated

bank. Bank funds over-perform their controls on a net-of-style basis by about 14.5

bps per month, which is both economically and statistically significant.

Since the bank and control funds have been matched on very strict criteria,

this result should be attributable to group affiliations. The Large Fund Interaction

and Small Fund Interaction terms are significantly negative in most regressions

showing the absence of these effects for very large or very small funds.

Table 7, Panel B reports the results after excluding funds with TNA less than

$50 million still using 1 control fund for each bank fund. Once again, we consider all

the alternative specifications of Table 7A and the results are equally robust. Bank

funds are seen to out-perform their respective controls on average by 14.65 bps per

month, thereby supporting hypothesis H1a.

In Panels C and D, we increase the number of control funds that we use for

each bank fund to five in order to check the sensitivity of our results to the choice of

the control funds. The specifications are otherwise identical to those reported in

Tables 7A and 7B respectively. Panel C contains the results with 5 control funds

while including funds with sizes in the range of $15-$50 million. Panel D excludes

these funds and focuses exclusively on funds with sizes exceeding $50 million. Once

again, we see that for all the different specifications, bank affiliated funds out-perform

their unaffiliated counterparts by approximately 11.3 bps per month.

Table 8, Panels A and B, reports the results for Fama-Macbeth (1973)

regressions performed on the sample used in Tables 7C and 7D respectively. Panel A

reports the results for the dataset including small funds (i.e. those with TNA in the

range of $15-$50 million) while Panel B excludes these funds. We report the results

using raw monthly returns (with and without style dummies) and net of style

returns. Once again, the results are equally strong across all specifications, although

the economic significance is slightly higher (approximately between 17-19 bps per

28
month). This suggests that bank funds benefit from investing in the stocks of firms to

which the affiliated banks are lending, thereby attributing the over-performance to

group affiliation.

4.2 Calendar Time Portfolio Regressions

As a further check, we conduct an even more stringent test for the effect of bank

affiliation on the returns of mutual funds. We construct a calendar time trading

strategy that takes a long position in the bank-affiliated funds and a short position in

their respective control funds.

The trading strategy is constructed in the following manner. We consider the

time period after the deal initiation date and go long in any bank fund that reports

to be holding the stock of a firm to which its affiliated bank is lending.20 We take a

long position in the fund starting in the quarter following the one in which the fund

reports to be holding the stock. In this way we ensure that our results are not being

driven by the increase in the stock price of the borrowing firm upon the

announcement of the bank loan.21 Each long position is matched with a short position

in the fund’s control and these positions are held for a period of six months, after

which both the bank fund and its control are dropped from the portfolio.

At each single point in time, we compute an equal- or value-weighted average

of the returns of the long and short positions, take the net of the two and regress the

net return on the 3 Fama-French (1993) factors as well as the Carhart (1997)

momentum factor.22 This portfolio formation technique is similar to the one employed

by Mamaysky, Spiegel and Zhang (2005) where portfolios of funds are formed each

20
The only constraint is that the fund must report to be holding the stock within a two-year window of
the start of the deal.
21
James (1987) found a positive stock price reaction to the announcement of new bank credit
agreements showing that banks provide some special service with their lending activity which is not
available from other lenders. Lummer and McConnell (1989) find that favorably revised credit
agreements generate positive returns while negatively revised ones generate significant negative returns.
22
We use the previous month TNA of the fund as its weight in constructing the value-weighted portfolio
return.

29
period on the basis of some characteristic and the returns on the portfolio are then

calculated. More specifically, we perform the following regressions:

R p ,t = α + β 1 (R m ,t − R f ,t ) + β 2 SMB t + β 3 HML t + β 4UMD t + ε p ,t (6),

where R p ,t represents the equal- or value-weighted return on the portfolio, Rm ,t ,

SMBt , and HMLt are the 3 Fama-French (1993) factors, UMDt is the Carhart (1997)

momentum factor and R f ,t is the risk-free rate. α is the measure of the abnormal

performance for this portfolio strategy. We focus on “Stock Funds” and report results

for funds with sizes exceeding $1, $15 and $50 million.

The results are reported in Table 9, Panels A, B and C.23 We report the

results for the market model, the Fama-French (1993) 3 factor model, as well as the 4

factor model containing momentum for both equal- and value-weighted portfolios. All

the results support hypothesis H2a and are both statistically and economically

significant. In the case of equal-weighted portfolios and using the 4 factor model,

bank affiliated funds outperform their control funds, on average, by 15 bps per

month. This magnitude is consistent with the results documented in the previous

sub-section. If we focus only on the funds with size exceeding $50 million (Table 9C),

we see that equal-weighted portfolios outperform their controls by nearly 17 bps per

month. For value-weighted portfolios, the results are even stronger. Bank funds

outperform their controls, on average, by about 26.5 bps per month and this result is

also robust to all the different specifications.

These results provide further evidence for our claim that bank funds benefit

from information about the loan transactions of their affiliated banks and that this

23
We report the results for funds with TNA>$1 million in these tests because, for the calendar time
strategy, we did not collapse the multiple classes of the same fund. This is because the strategy is
designed to be perfectly replicable for an outside investor who is supposed to go long and short in each
class of the fund, whether it is a bank fund or a control fund. In any case, given that portfolios are
constructed by taking the equal or value-weighted return of each fund/class, the use of classes as oppose
to funds should not make a difference.

30
information is responsible for their superior performance in the period following the

start of the deal.

5. Insider Information and the Performance of Borrowing Firms in

the Post-Deal Period

The analysis of the previous section suggests that bank funds display superior

performance. Is this performance related to the information contained in the lending

deal — information that is public after the deal takes place — or does there exist some

additional information that prevents other investors in the market from replicating

this trading strategy? That is, if the initiation of the deal itself is a positive signal

about the borrowing firm, then once the information of the deal becomes public,

mutual funds not affiliated with the lending bank could also invest in the stocks of

the borrowing firms to realize the superior post-deal performance. In that case, we

should be observing that non-affiliated (control) funds should also be increasing their

portfolio weights in the borrowing firms and that bank funds should not

systematically out-perform their controls.

However, affiliated funds may have some insider information about the

borrowing stocks which may not get revealed to outsiders just by the mere

announcement of the deal. Given that this information is not necessarily good in

every case, we would expect bank funds to increase their portfolio weights only in the

case of positive information — i.e., “winner” stocks — and decrease these in the case of

negative information — i.e., “loser” stocks. In this case, the deal itself will not be a

perfect signal of whether the stock of the borrowing firm will outperform the market

in future months and hence control funds may not be able to duplicate the strategy

of the bank funds at the time of the deal.

In order to check the significance of this insider information, we split the

stocks of borrowing firms into two categories: we define as “winner” stocks all those

31
stocks for which we observe an increase in Fraction in year +1 in comparison to year

-1 and as “loser” stocks all those stocks for which we observe a decline in Fraction in

year +1 in comparison to year -1 (where 0 represents the deal initiation date).24,25 If

our hypothesis about inside information is correct, “winner” stocks should out-

perform the “loser” stocks in the period following the deal (i.e., H3).

In order to test this hypothesis, we use two methodologies: the Returns

Across Time and Securities (RATS) method developed by Ibbotson (1975) and the

calendar time portfolio regression approach.26,27 The deal date is taken as the event

date in each of these tests.

Table 10, Panel A, presents the results for the RATS approach for both the

Fama-French (1993) three-factor model and the Carhart (1997) four-factor model. In

both cases, it is clear that the “winner” stocks out-perform the “loser” stocks. If we

use the three-factor model, for example, “winner” stocks generate a cumulative

abnormal return of 3.45% during the six months following the deal initiation which is

both economically and statistically significant. “Loser” stocks, on the other hand,

produce an abnormal return of -2.28%, which is not significantly different from zero.

The results are qualitatively similar when we use the four-factor model. “Winner”

stocks generate abnormal returns of approximately 4% in the six-months following

24
In the case of stocks for which some funds increase holdings while other funds decrease holdings, we
classify them still as “winner” stocks. To be classified as a loser stock, some fund must be decreasing its
holding in this stock in the post-deal period and no fund should be increasing the holding in this stock in
its portfolio.
25
Holding changes are constructed for the (-1, +1) year window surrounding the deal initiation. We take
the average quarterly Fraction computed at the fund-stock level before the deal and subtract this from
the average quarterly Fraction computed for the period after the deal.
26
This methodology estimates one cross-sectional regression for each event month j (j=0 is the deal
date) with j going from 1 to 12. The following regression is run for each event month j:
( ) ( )
Ri ,t − R f ,t = a j + b j Rm,t − R f ,t + c j SMBt + d j HMLt + e jUMDt + ε i ,t , where Ri,t is the monthly return for
stock i in calendar month t. Rf,t and Rm,t are the risk-free rate and the return on the market, respectively.
SMBt, HMLt and UMDt are the monthly returns on the size, book-to-market and the momentum factors
in month t, respectively. The numbers reported are sums of the intercepts of cross-sectional regressions,
aj, over the relevant event-time periods.
27
The time period for these tests runs from January 1994 to June 2004. The reason why we drop 1993 is
that we need to use one year of holdings data to determine whether to put the stock in the “winner” or
the “loser” category.

32
the deal initiation while the abnormal performance of the “loser” stocks is not

significantly different from zero.

Table 10, Panel B, presents the results for the calendar time strategy which is

constructed as follows: we take a long position in each “winner” stock and a short

position in each “loser” stock starting one month after the deal and hold it for 6

months after which it is dropped. We report the results for both equal- and value-

weighted portfolios, where the market value of the stock from the previous month is

used as the value-weight. We report the results for the calendar time portfolio

regressions conducted using the market model, the Fama-French (1993) three-factor

model as well as the Carhart (1997) four-factor model. In case of equal-weighted

portfolios, the results show that “winner” stocks outperform the “loser” stocks by

approximately 1.1% per month during the six-months following the initiation of the

deal. In case of value-weighted portfolios the magnitude of the out-performance is

bigger and is around 1.8% per month for the six months following the deal initiation.

These results highlight the fact that bank funds possess some information in

addition to the publicly available information about the borrowing firms. This allows

them to successfully increase portfolio weights in “winning” stocks and decrease those

in “losing” stocks around the time of deal initiation. Given the inside nature of this

information, control funds cannot pursue this strategy and hence we do not observe

any significant change in their holdings of borrowing stocks in the period around the

deal. As a result, bank funds are able to out-perform their respective control funds in

the post-deal period, as is documented in the previous sections.

As a further test of this ‘insider information’ hypothesis, we try to distinguish

between the performance of “winner” and “loser” stocks based on the extent of

insider information that the lending family might have about these firms. We proxy

for the level of insider information by using the ratio of the Deal Amount (obtained

from LPC) to the market capitalization of the firm at the end of the previous

33
calendar year with respect to the year of the deal initiation. Deals in which the

borrowed amount represents a larger fraction of the firm’s market capitalization

should encourage banks to analyze the borrower more thoroughly and hence generate

more insider information in the process. Therefore, we split the sample of “winner”

and “loser” stocks on this ratio using the median ratio. Stocks lying above the

median are labelled as “High Stake” firms while stocks lying below the median are

labelled as “Low Stake” firms. Based on the insider information story, we would

expect “High Stake” firms to significantly outperform the “Low Stake” firms. Also,

we would expect the “Low Stake” firms among the “winner” stocks to outperform the

“High Stake” firms among the “loser” stocks. Once again we use the RATS approach

to analyze the performance of the borrowing companies in the post-deal period.

The results are reported in Table 11. They are based on the Fama-French 3-

factor model as well as the Carhart 4-factor model are reported. As expected, in both

categories, i.e. “winner” and “loser” stocks, the “High Stake” firms outperform their

“Low Stake” counterparts. This means that stocks about which lending firms are

making more informed decisions tend to do better than those stocks about which

they make less informed decisions. Furthermore, the “Low Stake” group amongst

“winner” stocks is outperforms the “High Stake” group amongst “loser” stocks.28

All these results support the working hypothesis that bank funds change their

portfolio weights in the stocks of firms borrowing from affiliated banks on the basis of

insider information. Stocks in which bank funds increase their portfolio weights based

on more private information tend to do better than stocks in which funds increase

their portfolio weights based on less private information. Furthermore, even those

stocks in which funds increase their portfolio weights based on less private

information do better than those stocks in which they decrease their portfolio

28
Note that the cumulative average abnormal returns of the “High Stake” group amongst “loser” stocks
are insignificant while those for the “Low Stake” group amongst “winner” stocks are significant for the
4-factor model.

34
weights. Funds which do not belong to these conglomerates do not have access to this

information and, therefore, do not display any discernible change in their holdings of

borrowing firms, as was noted before.

6. Further Evidence on Fund Support Strategies

Our results, up to this point, highlight the fund support strategies which are

prevalent in conglomerates that are engaged in both banking and asset management

activities. In this section, we provide some preliminary evidence about another fund

support strategy taking place within these financial conglomerates: cheaper borrowing

conditions from the affiliated bank. In particular, we investigate whether there is any

borrowing cost differential when divisions of bank fund families borrow from other

divisions of the same family. We compare these “within-the-family loans” to other

financial deals in which the borrowers do not belong to the bank fund families. This

test, reminiscent of tests of transfer pricing, aims to assess whether cheaper loans are

granted to the other divisions within the same family.

In order to carry out this test, we focus only on those borrowing deals in the

LPC database where the borrowing firm itself is a financial firm between the periods

of January 1993 till June 2004.29 We further separate those deals where the borrowing

firm belongs to a financial conglomerate (i.e. a conglomerate comprising both mutual

funds and banks) and where at least one of the lenders (in case of a syndicate) also

belongs to the same family. Then, we compare the cost of borrowing for these deals

to the cost of borrowing for all the other financial deals where the borrowing firm

does not belong to these conglomerates. The cost of borrowing is denoted as the Yield

Spread and is measured by the variable “All in Drawn Spread” (available in the LPC

database) which is the coupon spread over LIBOR plus the annual fee plus the up-

front fee (divided by the loan maturity). We then test whether there is any

29
This is done by considering only those deals for which the Primary SIC code for the borrower, as
reported by LPC, falls within the range of 6000-6999.

35
significant difference in the mean and median borrowing costs between these two

groups.30

The results are reported in Table 12. Panel A presents the results of the

differential in borrowing cost for all Within Family Deals Involving Bank Fund

Conglomerates against All Other Financial Deals. We are able to identify 127 deals

where the borrower and at least one lender belonged to the same bank fund family

and 7,093 deals where the borrower did not belong to the bank fund family. The

difference in the mean and median Yield Spread for these two groups is striking. It

seems that divisions within the conglomerate borrow from their banking division at

median rates which are three times less than the median rates of all the other

financial deals. In particular, the difference between the two groups is a sizable 100

basis points.

From the 127 ‘within family’ deals, we further sift out those deals where the

borrower is the asset management division of the bank fund conglomerate and where

at least one lender in the syndicate also belongs to the same family. We are able to

identify 30 such deals and compare these to the group of All Other Financial Deals.

Also in this case, we test whether there is any significant difference in the mean and

median borrowing costs between these two groups. Panel B reports the results for

this group of tests. As in the previous tests, we see that within banking families, asset

management divisions borrow at a cost which is much smaller than the rates

prevailing for other financial firms. In particular, the mean and median borrowing

costs are three times lower than the costs for the case of all the other deals.

As a final check, from the set of All Other Financial Deals, we also separate

out those deals where the borrowers belong to the category of Trading Firms or Real

Estate Firms (in case the cost of borrowing for these firms is systematically different

30
In these tests, unlike the earlier tests, we consider all the facilities for each individual deal since the
borrowing rates could vary for different facilities of the same deal.

36
from that of banking and insurance divisions).31 We then compare the cost of

borrowing for this subset of borrowers to the cost of borrowing for the case where the

borrower is the asset management division of the bank fund conglomerate and where

at least one lender in the syndicate also belongs to the same family. The results are

reported in Panels C and D. In Panel C, we only consider Trading Firm borrowers

while in Panel D we consider borrowers belonging to either the Trading Firms or

Real Estate Firms categories. The results, quantitatively and qualitatively similar to

the previous findings, show that within banking families the cost of borrowing is

smaller. That is, both the mean and the median Yield Spreads are much lower for

deals occurring between divisions of the same bank fund families.

Although the limited size of the sample prevents us from ascribing too much

weight to these results, yet, they do serve to bolster our earlier findings on fund

support strategies. Taken together with the other findings, these results suggest that

banks affiliated to mutual funds not only provide their affiliated funds with inside

information about the firms to which they lend but that they also directly help their

affiliated funds with cheaper loans.

On the whole, these findings show that financial conglomerates help the

investment arms of their groups by either using the information generated by their

lending activity to help their investment activity, or by directly funneling resources

by using the bank to lend at cheaper rates to other divisions within the same

conglomerate. What is the benefit for the group? One way for the bank funds to

channel back resources to their lending divisions is to borrow from their affiliated

banks at a cost higher than the one at which they could have borrowed from

unaffiliated lenders. As we see from the preliminary analysis in this section, however,

this seems not to be the case. An alternative way could be the sharing of the profits

of the investment division with the other divisions within the conglomerate. While

31
This is done with the help of the Primary SIC codes reported by LPC, using the industry
classifications provided by Fama and French (1997).

37
there is no direct information on the way profits are allocated within the group, it is

reasonable to assume that the conglomerate has a share in the profits of both the

lending and the investment arms. The indirect costs of the transfer of information

from the bank to the mutual funds are minimal, involving just a potential indirect

cost for the borrower in terms of higher insider trading and lower liquidity. This

suggests that the group stands to benefit out of this transfer. Moreover, in terms of

reputation, the better performance of the funds — still assuming that the potential

damage to the reputation of the bank is not significant — may have a positive

externality for the entire conglomerate by increasing the brand value of the entire

group. We leave this analysis for future research.

Conclusion

We focus on the real consequences of the relationships between mutual funds and

banks which belong to the same financial group. In particular, we test how affiliation

with a financial group that also contains a bank affects the portfolio allocation and

performance of a fund. We consider two alternative hypotheses. Either mutual funds

are used to support the overall policy of the financial group to which they belong —

e.g., by supporting the price of the stocks of the firms borrowing from the affiliated

bank — or they exploit the privileged inside information available to the affiliated

bank and use it to construct their portfolio. We test these hypotheses focusing on all

the actively managed US equity funds over from January 1993 to June 2004.

We show that the mutual funds affiliated with banks increase their portfolio

weights in the stocks of firms borrowing from these banks around the time of the

initiation of the deal. No analogous finding is there for funds that are not part of the

same group. Also, group affiliation increases fund net-of-style performance, on

average, by 15 basis points per month (approximately 1.8% per year) above that of

38
control funds in the post-deal era. This extra-performance is due to inside

information and it is not replicable by the non-bank funds.

Our findings have important positive as well as normative implications and

raise some regulatory concerns. They suggest that there exists a flow of information

between the banking and mutual fund divisions of these conglomerates despite the

erection of Chinese walls designed to curb these flows. Regulators need to look more

closely into this area to ensure that certain funds do not reap an unfair advantage by

acquiring ‘inside’ information from their banking divisions. This is very different from

the recent scandals — i.e., market timing or late trading — in which fund investors

have been exploited.

Our results also contribute to the literature on firm boundaries by showing

that information transmission between different firm divisions could be an important

determinant of where these boundaries are drawn. Moreover, by showing that bank

affiliated funds invest more heavily in the stock of borrowing firms than other

comparable non-affiliated funds, our results shed some light on how firm boundaries

can influence resource allocation decisions.

39
 References

Allen, F. and D. Gale, 1995, ‘A Welfare Comparison of Intermediaries and Financial Markets
in Germany and the U.S.’ European Economic Review 39 (1995) 179-209.
Arrow, Kenneth, 1975, ‘Vertical Integration and Communication,’ Bell Journal of Economics,
6, 173-82.
Arrow, Kenneth, 1985, ‘Informational Structure of the Firm,’ American Economic Review,
Papers and Proceedings, Vol. 75, No. 2.
Bhattacharya, Utpal and Matthew Spiegel, 1991, ‘Insiders, Outsiders and Market
Breakdowns,’ Review of Financial Studies, Vol. 4, No. 2.
Bhide, Amar, 1993, The hidden costs of stock market liquidity, Journal of Financial
Economics 34, 31-51.
Bolton, Patrick, and Ernst-Ludwig von Thadden, 1998a, Blocks, liquidity, and corporate
control, Journal of Finance 53 (1), 1-25.
Bolton, Patrick, and Ernst-Ludwig von Thadden, 1998b, Liquidity and control: a dynamic
theory of corporate ownership structure, Journal of Institutional and Theoretical
Economics, 154, 177-211.
Brunnermeier, Markus and Stefan Nagel, 2004, “Hedge Funds and the Technology Bubble,”
Journal of Finance, Vol. 59, No. 5.
Carhart, Mark, 1997, ‘On Persistence in Mutual Fund Performance’, Journal of Finance 52
(1) 57-82.
Chen, Joseph, Harrison Hong, Ming Huang, and Jeffrey D. Kubik, 2004, ‘Does Fund Size
Erode Mutual Fund Performance? The Role of Liquidity and Organization,’
American Economic Review, forthcoming.
Chevalier, Judith, 2000, ‘What do We Know About Cross-subsidization? Evidence from the
Investment Policies of Merging Firms,’ Yale University, mimeo.
Coffee, J., 1991, ‘Liquidity Versus Control: The Institutional Investor as Corporate Monitor,’
Columbia Law Review 91, 1277-1368.
Ellis, K, Michaely, R. and M. O’Hara, 2000, ‘When the Underwriter is the Market Maker: An
Examination of Trading in the IPO Market’, Journal of Finance, 55, 1039-1074.
Elton, Edwin J., Martin J. Gruber and Christopher R. Blake, 2001, ‘A First Look at the
Accuracy of the CRSP Mutual Fund Database and a Comparison of the CRSP and
Morningstar Mutual Fund Databases,’ Journal of Finance, Vol. 56, 2415-2430.
Fama, Eugene F. and Kenneth R. French, 1993, ‘Common Risk Factors in the Returns on
Stocks and Bonds,’ Journal of Financial Economics 33, 3-56.
Fama, Eugene F. and Kenneth R. French, 1997, ‘Industry Costs of Equity,’ Journal of
Financial Economics, Vol. 43, Issue 2.
Fama, Eugene F. and James D. Macbeth, 1973, ‘Risk Return and Equilibrium: Empirical
Tests, Journal of Political Economy,’ 81, 607-636.

40
Gaspar, Jose-Miguel, Massimo Massa and Pedro Matos, 2004, “Favoritism in Mutual Fund
Families? Evidence on Strategic Cross-Fund Subsidization,” Journal of Finance,
forthcoming.
Guedj, Ilan, and Jannette Papastaikoudi, 2004, ‘Can Mutual Fund Families Affect the
Performance of Their Funds?,’ Working Paper, MIT.
Holmstrom, Bengt, and John Roberts, 1998, ‘The Boundaries of the Firm Revisited,’ Journal
of Economic Perspectives, Vol. 12, No. 4.
Ibbotson, Roger G., 1975, “Price Performance of New Issues,” Journal of Financial
Economics, Vol. 2, Issue 3.
Irvine, Paul, Marc Lipson and Andrew Puckett, 2004, “Tipping,” Working Paper.
James, Christopher, 1987, ‘Some Evidence on the Uniqueness of Bank Loans,’ Journal of
Financial Economics 19, 217-235.
Kahn, Charles, and Andrew Winton, 1998, ‘Ownership Structure, Speculation and
Shareholder Intervention,’ Journal of Finance 53(1), 99-129.
Khorana, Ajay and Henri Servaes, 1999, ‘The Determinants of Mutual Fund Starts’, Review
of Financial Studies 12, 1043-1074.
Lummer, S.L. and J.J. McConnell, 1989, ‘Further Evidence on the Bank Lending Process and
the Capital Market Response to Loan Agreements,’ Journal of Financial Economics
25, 99-122.
Mamaysky, Harry and Matthew Spiegel, 2002, ‘A Theory of Mutual Funds: Optimal Fund
Objectives and Industry Organization,’ Working Paper, Yale University.
Mamaysky, Harry and Matthew Spiegel and Hong Zhang, 2005, ‘Improved Forecasting of
Mutual Fund Alphas and Betas,’ Working Paper, Yale University.
Massa, Massimo, 2003, ‘How do family strategies affect fund performance? When
performance-maximization is not the only game in town’, Journal of Financial
Economics 67(2), 249-304.
Maug, E., 1998, ‘Large Shareholders as Monitors: Is There a Trade-off Between Liquidity and
Control?,’ Journal of Finance 53 (1), 65-98.

Mullainathan, Sendhil and David Scharfstein, 2001, ‘Do Firm Boundaries Matter?’ American
Economic Review Papers and Proceedings, Vol. 91, No. 2.

Nanda, Vikram, Wang, Jay and Lu Zheng, 2004, ‘Family Values and the Star Phenomenon:
Strategies of Mutual Fund Families,’ Review of Financial Studies, Vol. 17, No. 3.
Noe, Thomas, 2002, ‘Investor Activism and Financial Market Structure,’ Review of Financial
Studies, 15 (1), 289-318.

Sirri, Erik R. and Peter Tufano, 1998, ‘Costly Search and Mutual Fund Flows,’ The Journal
of Finance, Vol. 53, No. 4.

Wermers, Russ, 2000, ‘Mutual Fund Performance: An Empirical Decomposition into Stock
Picking Talent, Style, Transaction Costs and Expenses, The Journal of Finance,
Vol. 55, No. 4.

41
Appendix A: The Merge of the CRSP Mutual Fund and Spectrum
Datasets

Our merging procedure follows that of Wermers (2000). First, we perform a

merge based on the ticker. The ticker is the five-digit code that is used to represent a
stock or a mutual fund. The ticker in CRSP comes from the annual summary data
file. The column called ticker has the NASDAQ ticker symbol as a five-character
field. In Spectrum, the ticker comes from file 8, the Fund Ticker Information file. The
fund ticker symbol here is also a five-character symbol.

An important shortcoming in using tickers, though, is that they are available

for the years 1999, 2000 and 2001. We then have to extrapolate the 1999 tickers to
prior years, whenever possible. Nonetheless, it should be noted that some funds’
tickers were changed during the course of time. Some funds had died and their tickers
had been reused. Thus, the reliability of the ticker merge weakens as we move back
in time before 1999.

We therefore consider a second criterion: fund name. Unfortunately, the

CRSP database uses a 50-character text field for the name, while Spectrum uses a 25-
character field for the name of the fund. Thus, the names are abbreviated differently
in both databases. We use a “name recognition” code written in Delphi to match the
names. This code is based on the idea of matching two strings. The names of the two
databases are arranged beside each other, and each name is compared with every
name in the other database. Certain assumptions are made about the way fund
names are abbreviated in Spectrum. For example, for each name, the word fund is
dropped in Spectrum and firm is abbreviated to Co. A match of 90% or more is
considered to be a good match and is accepted. This match has a lower priority than
the ticker merge. This means that if there is a conflict in the merge between the
name merge and the ticker merge, the conflict is resolved by considering the ticker
merge as valid.

Finally, for all the other cases, as well as the ones that seemed to be dubious,
we perform an “eye match” i.e., funds are manually compared. A SAS program then
combines the name match and the eye match to produce a final match.

42
 Appendix B: Variable Definitions

Panel A: Definitions of Mutual Fund Variables

Variable Name Database Used Data Items Used Definition

Lag Annual Return CRSP Mutual Funds RET Gross return for the fund in the previous twelve months.

Total Net Assets CRSP Mutual Funds TNA The Total Net Assets (TNA) (end-of-period) is the closing market value of
securities owned, plus all assets, minus all liabilities. TNAs are reported in
millions of dollars.

Size of Fund Family CRSP Mutual Funds ICDI, MGMT_NO Total number of individual funds belonging to a particular fund family
(MGMT_NO) in a particular month.

Turnover CRSP Mutual Funds TURNOVER Minimum of total purchases and total sales, standardized by the average Total
Net Assets of the fund.

Total Fees CRSP Mutual Funds EXPENSES, TOT_LOAD Total Fees is the sum of EXPENSES and TOTAL LOAD, computed as EXPENSES
+ (1/7)*(TOTAL_LOAD) (See Sirri and Tufano, (1998)). EXPENSES are defined
as the percentage of the total investment that shareholders pay for the mutual
fund’s operating expenses (including 12b-1 Fees). TOTAL LOAD is the Total of
All Maximum Front, Deferred, and Redemption Fees. It is a percentage total of
loads applied to a fund.

Assets Under Family CRSP Mutual Funds TNA, MGMT_NO Sum of the Total Net Asset values of the individual funds belonging to a
Management particular fund family (MGMT_NO) in a particular month.

Fund Age CRSP Mutual Funds YEAR, F_DATE Time in years since the mutual fund began trading (identified using F_DATE).

Investment Objective CRSP Mutual Funds ICDI_OBJ A 2-character code which identifies the Fund's investment strategy as identified
by Standard & Poor's Fund Services.

43
 Panel B: Definitions of Holding & Deal-Specific Variables

Variable Name Database Used Data Items Used Definition

Fraction Spectrum Mutual Funds SHARES, PRC, ASSETS The market value of the stock holding by the bank funds of the borrowing firm,
as a percentage of the total assets of the fund at that time. The market value is
computed using end-of-the-quarter share price for the quarter for which the
holding is reported.

Cumulative Fraction Spectrum Mutual Funds SHARES, PRC, ASSETS The sum of the Fraction variable at a point in time for each fund.

Adjusted Fraction Spectrum Mutual Funds SHARES, PRC, ASSETS The market value of the stock holding by the bank funds of the borrowing firm,
as a percentage of the total assets of the fund at that time. The market value is
computed using the earliest stock price in the (-2, +2) year window around the
deal date for which a fund is seen to hold the stock of the borrowing firm.

Deal Active Date Loan Pricing Corporation Deal Active Date The launch date of a deal.

Lead Arranger Loan Pricing Corporation Lead Arranger Top tier lender(s) in a deal, responsible for arranging a loan syndication.

Yield Spread Loan Pricing Corporation All in Drawn Spread Coupon spread over LIBOR plus the annual fee plus the up-front fee (divided by
the loan maturity).

Deal Amount Loan Pricing Corporation Deal Amount Total amount of the deal, all tranches included.

44
 Table 1: Summary Statistics
These tables present various summary statistics for “Bank Funds”. We define as “Bank Funds” all
those mutual funds which belong to a fund family that also owns a bank. To be included in the
sample, total net assets of the fund must exceed at least $1 million, fund age must exceed 1 year, and
stocks should comprise more than 85% of the funds’ portfolio while bonds should not comprise more
than 2% of the portfolio (which excludes approximately the top 2.5% of funds ranked in terms of
bond holdings). Multiple classes of the same fund have been removed. The time period for the sample
is from Jan. 1993 to June 2004.

Panel A: Summary Statistics for Bank Funds

This table presents summary statistics for the variables used in subsequent analyses. The number of
observations for each variable is given under the condition that data on all the main variables should
be non-missing. Observations are defined at the fund-stock-quarter level for all variables apart from
(*) where the observations are defined at the fund-month level. The definitions for each variable are
provided in Appendix B.

Variable Obs. Mean Median Std. Dev.

Explanatory Variables
Lag Annual Return (%) 13,154 6.34 7.25 21.08
Total Net Assets (Funds) ($ mil.) 13,154 718.59 410.07 955.47
Size of Fund Family 13,154 155.93 154 78.15
Turnover 13,154 0.58 0.53 0.47
Total Fees (%) 13,154 0.94 0.98 0.58
Assets Under Family Management ($ mil.) 13,154 70,066 75,679 36,656
Fund Age 13,154 6.44 5.94 3.64

Holding Variables
Fraction (%) 13,154 0.73 0.38 1.09
Cumulative Fraction* (%) 5,140 6.91 3.23 9.52

Panel B: Number of Distinct Entities Involved in the Sample

This table describes the number of distinct entities which are involved in the sample. The Number of
Distinct Bank Funds shown below is the number of distinct funds which are involved in holding the
stock of a firm to which an affiliated bank is also lending during years -2 to +2 around the deal date
(where 0 depicts the date of the start of the deal as reported by Loan Pricing Corporation (LPC)).
Note that this figure is obtained after removing multiple classes of the same fund. Number of Distinct
Families capture the number of distinct fund families involved in the sample. Number of Distinct
Stocks refer to the number of distinct borrowing stocks while the Number of Distinct Deals captures
the number of distinct deals from which the data has been obtained. Each deal can only involve one
borrowing firm (i.e. cusip) but can involve multiple lending banks and hence fund families and funds.
Stock Funds Only refers to the following CRSP mutual fund categories: AG, BL, GI, LG and TR.

All Categories Stock Funds Only

(TNA>$1 mil.) (TNA>$1 mil.) (TNA>$15 mil.) (TNA>$50 mil.)
(1) (2) (3) (4)
Number of Distinct Funds 339 291 286 261
Number of Distinct Families 37 37 36 36
Number of Distinct Stocks 893 878 877 858
Number of Distinct Deals 1,245 1,228 1,227 1,182

45
 Table 2: Change in Fraction Around Deal Date: Univariate Results

This table presents results of univariate tests for changes in Fraction around the deal date for
bank funds. We define as Bank Funds all those mutual funds which belong to a fund family
that also owns a bank. At any point in time, Fraction is defined as the stock holding by the
bank funds of the borrowing firm, as a percentage of the total assets of the fund at that time.
This variable is measured over the interval -2 to +2 years around the deal date (where 0 depicts
the date of the start of the deal as reported by Loan Pricing Corporation (LPC)). A borrowing
firm is defined as that firm which is borrowing from a bank that is affiliated to the fund. The
observations are at the fund-stock-quarter level. The table reports percentage changes in both
the mean and median Fraction along with univariate tests for the significance of these changes.
To be included in the sample, total net assets of the fund must exceed at least $1 million, fund
age must exceed 1 year, and stocks should comprise more than 85% of the funds’ portfolio while
bonds should not comprise more than 2% of the portfolio (which excludes approximately the
top 2.5% of funds ranked in terms of bond holdings). Multiple classes of the same fund have
been removed. Stock Funds Only refers to the following CRSP mutual fund categories: AG, BL,
GI, LG and TR. ***, ** and * denote significance levels of 1%, 5% and 10% respectively.

Panel A: All Categories (TNA>$1 mil.)

% Change Median Wilcoxon

in Fraction T-Test 2 Sample Test 2 Sample Test
Mean Fraction 12.20% 4.39***
Median Fraction 21.38% 4.87*** 4.80***
Observations 13,154

Panel B: Stock Funds Only (TNA>$1 mil.)

% Change Median Wilcoxon

in Fraction T-Test 2 Sample Test 2 Sample Test
Mean Fraction 8.66% 3.37***
Median Fraction 15.62% 3.87*** 3.77***
Observations 12,232

Panel C: Stock Funds Only (TNA>$15 mil.)

% Change Median Wilcoxon

in Fraction T-Test 2 Sample Test 2 Sample Test
Mean Fraction 9.07% 3.49***
Median Fraction 15.59% 3.49*** 3.78***
Observations 12,116

Panel D: Stock Funds Only (TNA>$50 mil.)

% Change Median Wilcoxon

in Fraction T-Test 2 Sample Test 2 Sample Test
Mean Fraction 9.98% 3.77***
Median Fraction 15.73% 3.85*** 3.78***
Observations 11,545

46
 Table 3: Change in Adjusted Fraction Around Deal Date: Univariate
Results

This table presents results of univariate tests for changes in Adjusted Fraction around the deal
date for bank funds. We define as Bank Funds all those mutual funds which belong to a fund
family that also owns a bank. At any point in time, Adjusted Fraction is defined as the market
value of the stock holding by the bank funds of the borrowing firm, as a percentage of the total
assets of the fund at that time. The market value is computed by using the earliest share price
in the (-2, +2) year window around the deal date in which the bank fund is seen to hold the
stock of the borrowing firm. This variable is measured over the interval -2 to +2 years around
the deal date (where 0 depicts the date of the start of the deal as reported by Loan Pricing
Corporation (LPC)). A borrowing firm is defined as that firm which is borrowing from a bank
that is affiliated to the fund. The observations are at the fund-stock-quarter level. The table
reports percentage changes in both the mean and median Adjusted Fraction along with
univariate tests for the significance of these changes. To be included in the sample, total net
assets of the fund must exceed at least $1 million, fund age must exceed 1 year, and stocks
should comprise more than 85% of the funds’ portfolio while bonds should not comprise more
than 2% of the portfolio (which excludes approximately the top 2.5% of funds ranked in terms
of bond holdings). Multiple classes of the same fund have been removed. Stock Funds Only
refers to the following CRSP mutual fund categories: AG, BL, GI, LG and TR. ***, ** and *
denote significance levels of 1%, 5% and 10% respectively.

Panel A: All Categories (TNA>$1 mil.)

% Change Median Wilcoxon

In Adjusted Fraction T-Test 2 Sample Test 2 Sample Test
Mean Adjusted Fraction 22.55% 5.93***
Median Adjusted Fraction 23.64% 5.82*** 5.87***
Observations 13,154

Panel B: Stock Funds Only (TNA>$1 mil.)

% Change Median Wilcoxon

In Adjusted Fraction T-Test 2 Sample Test 2 Sample Test
Mean Adjusted Fraction 17.56% 5.71***
Median Adjusted Fraction 21.82% 4.75*** 4.70***
Observations 12,232

Panel C: Stock Funds Only (TNA>$15 mil.)

% Change Median Wilcoxon

In Adjusted Fraction T-Test 2 Sample Test 2 Sample Test
Mean Adjusted Fraction 18.42% 5.90***
Median Adjusted Fraction 21.87% 4.66*** 4.77***
Observations 12,116

Panel D: Stock Funds Only (TNA>$50 mil.)

% Change Median Wilcoxon

In Adjusted Fraction T-Test 2 Sample Test 2 Sample Test
Mean Adjusted Fraction 19.23% 6.01***
Median Adjusted Fraction 20.25% 4.32*** 4.70***
Observations 11,545

47
 Table 4: Change in Fraction Around Deal Date: Multivariate Results

This table presents results of multivariate regressions for changes in Fraction and Adjusted Fraction around the deal date for bank and control funds. At any
point in time, Fraction is defined as the stock holding by the bank funds of the borrowing firm, as a percentage of the total assets of the fund at that time.
Adjusted Fraction is defined as the market value of the stock holding by the bank funds of the borrowing firm, as a percentage of the total assets of the fund at
that time computed by using the earliest share price in the (-2, +2) year window around the deal date in which the bank fund is seen to hold the stock of the
borrowing firm. These variables are measured over the interval -2 to +2 years around the deal date (where 0 depicts the date of the start of the deal as reported
by Loan Pricing Corporation (LPC)). A borrowing firm is defined as that firm which is borrowing from a bank that is affiliated to the fund. The observations
are at the fund-stock-quarter level. Multiple classes of the same fund have been removed. Stock Funds Only refers to the following CRSP mutual fund
categories: AG, BL, GI, LG and TR. The dependent variable is Fraction and the main explanatory variable is the Post-Deal Dummy which is equal to 1 in the
period following the deal and is equal to zero in the period before the deal. The other explanatory variables are defined in Appendix B. The tables contain
results for specifications in which we do not control for clustering and those where we control for clustering around the individual mutual funds. Style dummies
are defined at the level of the investment objective category. ***, ** and * denote significance levels of 1%, 5% and 10% respectively using heteroskedasticity
robust standard errors.

Panels A & B: Bank Funds Only

Bank Funds are defined as those mutual funds which belong to a fund family that also owns a bank. In Panel A, the dependent variable is Fraction while in
Panel B, it is Adjusted Fraction. The main explanatory variable is the Post-Deal Dummy which is equal to 1 in the period following the deal and is equal to
zero in the period before the deal. Only those bank funds are included in the subsequent analysis for which at least one control fund with non-missing data on
the key variables could be identified. To be included in the sample, total net assets of the fund must exceed at least $1 million, fund age must exceed 1 year, and
stocks should comprise more than 85% of the funds’ portfolio while bonds should not comprise more than 2% of the portfolio (which excludes approximately the
top 2.5% of funds ranked in terms of bond holdings).

Panel C: Control Funds Only

Control funds are those funds which do not belong to a fund family which owns a bank and which have been matched on a yearly basis with the bank funds on
the basis of investment objective, total net assets of the fund, total net assets of the fund family and fund return over the previous year. To be chosen as a
control fund, the fund must belong to the same investment objective as the bank fund and must have the smallest absolute percentage difference (computed as
the sum of the absolute percentage difference for total net assets of the fund, total assets under family management and fund return over the previous year) with
respect to the bank fund. In this way, we pick the 5 closest funds to each bank fund, and use these in the analysis below. Note that for each bank fund, a new
control fund may be chosen in each separate year. The deal date which is attributed to the control fund comes from the bank fund. If the control fund does not
hold the stock of the firm to which the family of the bank fund is lending, we put Fraction equal to zero. Fraction is the dependent variable and the main
explanatory variable is the Post-Deal Dummy which is equal to 1 in the period following the deal and is equal to zero in the period before the deal.

48
 Table 4, Panel A: Bank Funds Only (Using Fraction)

All Categories Stock Funds Only Stock Funds Only Stock Funds Only
(TNA>$1 Mil.) (TNA>$1 Mil.) (TNA > $15 Mil.) (TNA > $50 Mil.)
Explanatory Variables (1) (2) (3) (4) (5) (6) (7) (8)

Post-Deal Dummy .00078*** .00078** .00077*** .00077** .00076*** .00076** .00079*** .00079**
(4.45) (2.51) (4.88) (2.55) (4.80) (2.48) (4.82) (2.35)
Lag Annual Return -.00428*** -.00428*** -.00375*** -.00375** -.00374*** -.00374** -.00271*** -.00271*
(-7.27) (-2.78) (-6.87) (-2.39) (-6.75) (-2.34) (-4.81) (-1.83)
Total Net Assets -.00028*** -.00028 -.00026*** -.00026 -.00012 -.00012 -.00049*** -.00049
(-3.86) (-0.53) (-3.67) (-0.47) (-1.60) (-0.20) (-5.85) (-0.86)
Size of Fund Family -.00193*** -.00193** -.00111*** -.00111 -.00109*** -.00109 -.00128*** -.00128
(-8.15) (-2.10) (-6.04) (-1.35) (-5.88) (-1.30) (-6.74) (-1.47)
Turnover .00019 .00019 .00140*** .00140* .00130*** .00130* .00120*** .00120
(0.69) (0.23) (6.22) (1.77) (5.80) (1.65) (5.37) (1.56)
Total Fees .00325*** .00325*** .00419*** .00419*** .00408*** .00408*** .00397*** .00397***
(14.27) (4.13) (22.14) (5.66) (21.53) (5.65) (20.68) (5.63)
Assets Under Family Management -.00108*** -.00108* -.00120*** -.00120** -.00125*** -.00125** -.00112*** -.00112**
(-7.24) (-1.91) (-8.64) (-2.23) (-8.94) (-2.30) (-7.74) (-2.07)
Intercept .01990*** .01990*** .01835*** .01835*** .01824*** .01824*** .01809*** .01809***
(9.60) (3.22) (9.86) (3.32) (9.67) (3.23) (9.25) (3.02)

Clustering No Yes No Yes No Yes No Yes

Style Dummies Yes Yes Yes Yes Yes Yes Yes Yes
R-Squared 0.1218 0.1218 0.1173 0.1173 0.1094 0.1094 0.1112 0.1112
Obs. 13,154 13,154 12,232 12,232 12,116 12,116 11,545 11,545

49
 Table 4, Panel B: Bank Funds Only (Using Adjusted Fraction)

All Categories Stock Funds Only Stock Funds Only Stock Funds Only
(TNA>$1 Mil.) (TNA>$1 Mil.) (TNA > $15 Mil.) (TNA > $50 Mil.)
Explanatory Variables (1) (2) (3) (4) (5) (6) (7) (8)

Post-Deal Dummy .00157*** .00157*** .00145*** .00145*** .00146*** .00146*** .00149*** .00149***
(6.27) (3.75) (7.11) (3.60) (7.12) (3.55) (7.03) (3.39)
Lag Annual Return -.00794*** -.00794*** -.00649*** -.00649*** -.00643*** -.00643*** -.00535*** -.00535**
(-6.99) (-3.74) (-5.96) (-2.92) (-5.81) (-2.84) (-4.59) (-2.39)
Total Net Assets -.00040*** -.00040 -.00036*** -.00036 -.00023** -.00023 -.00067*** -.00067
(-4.12) (-0.65) (-3.87) (-0.55) (-2.36) (-0.33) (-5.86) (-0.97)
Size of Fund Family -.00239*** -.00239** -.00144*** -.00144 -.00141*** -.00141 -.00161*** -.00161
(-5.93) (-2.07) (-4.72) (-1.42) (-4.56) (-1.36) (-4.90) (-1.47)
Turnover -.00023 -.00023 .00133*** .00133 .00122*** .00122 .00113*** .00113
(-0.54) (-0.20) (4.99) (1.47) (4.55) (1.35) (4.20) (1.28)
Total Fees .00295*** .00295*** .00420*** .00420*** .00407*** .00407*** .00398*** .00398***
(7.97) (2.92) (15.45) (4.99) (14.88) (4.95) (14.19) (4.87)
Assets Under Family Management -.00120*** -.00120* -.00119*** -.00119* -.00124*** -.00124* -.00109*** -.00109
(-5.22) (-1.77) (-5.64) (-1.79) (-5.80) (-1.84) (-4.74) (-1.57)
Intercept .02627*** .02627*** .02157*** .02157*** .02152*** .02152*** .02154*** .02154**
(7.35) (3.30) (6.74) (2.88) (6.64) (2.83) (6.17) (2.58)

Clustering No Yes No Yes No Yes No Yes

Style Dummies Yes Yes Yes Yes Yes Yes Yes Yes
R-Squared 0.1010 0.1010 0.0881 0.0881 0.0811 0.0811 0.0826 0.0826
Obs. 13,154 13,154 12,232 12,232 12,116 12,116 11,545 11,545

50
 Table 4, Panel C: Control Funds (Using Fraction and up to 5 control funds per Bank Fund)

All Categories Stock Funds Only Stock Funds Only Stock Funds Only
(TNA>$1 Mil.) (TNA>$1 Mil.) (TNA > $15 Mil.) (TNA > $50 Mil.)
Explanatory Variables (1) (2) (3) (4) (5) (6) (7) (8)

Post-Deal Dummy .000004 .000004 .00002 .00002 .00003 .00003 .00004 .00004
(0.11) (0.06) (0.39) (0.22) (0.66) (0.38) (0.86) (0.49)
Lag Annual Return -.00133*** -.00133*** -.00136*** -.00136*** -.00138*** -.00138*** -.00125*** -.00125***
(-13.43) (-5.03) (-13.28) (-4.94) (-13.26) (-4.98) (-11.97) (-4.53)
Total Net Assets -.00009*** -.00009 -.00007*** -.00007 -.00005** -.00005 -.00011*** -.00011
(-4.14) (-1.20) (-3.10) (-0.88) (-2.46) (-0.66) (-4.88) (-1.37)
Size of Fund Family .00017*** .00017 .00013*** .00013 .00014*** .00014 .00014*** .00014
(4.88) (1.47) (3.90) (1.15) (4.08) (1.20) (3.89) (1.14)
Turnover -.00011*** -.00011 -.00012*** -.00012 -.00011*** -.00011 -.00014*** -.00014
(-4.87) (-1.43) (-5.27) (-1.52) (-4.78) (-1.34) (-5.75) (-1.64)
Total Fees .00005 .00005 .00010*** .00010 .00010*** .00010 .00014*** .00014
(1.54) (0.41) (2.87) (0.74) (2.77) (0.67) (3.60) (0.88)
Assets Under Family Management .00001 .00001 -.00003 -.00003 -.00006*** -.00006 -.00010*** -.00010
(0.51) (0.16) (-1.47) (-0.52) (-2.70) (-0.92) (-3.68) (-1.29)
Intercept .00190*** .00190** .00286*** .00286*** .00263*** .00263*** .00309*** .00309***
(6.93) (2.44) (5.52) (3.38) (8.63) (3.52) (9.11) (3.65)

Clustering No Yes No Yes No Yes No Yes

Style Dummies Yes Yes Yes Yes Yes Yes Yes Yes
R-Squared 0.0225 0.0225 0.0172 0.0172 0.0170 0.0170 0.0173 0.0173
Obs. 63,571 63,571 59,084 59,084 58,531 58,531 55,705 55,705

51
 Table 5: Change in Fraction Around Deal Date: Multivariate Results on Stacked Data

This table presents results of multivariate regressions for changes in Fraction around the deal date for bank funds and control funds, where the bank funds and
control funds data have been stacked. Bank funds are defined as those mutual funds which belong to a fund family that also owns a bank. Control funds are
those funds which do not belong to a fund family which owns a bank and which have been matched on a yearly basis with the bank funds on the basis of
investment objective, total net assets of the fund, total net assets of the fund family and fund return over the previous year. To be chosen as a control fund, the
fund must belong to the same investment objective as the bank fund and must have the smallest absolute percentage difference (computed as the sum of the
absolute percentage difference for total net assets of the fund, total assets under family management and fund return over the previous year) with respect to the
bank fund. In this manner, we are able to pick out 1 to 5 closest control funds for each bank fund.

At any point in time, Fraction is defined as the stock holding by the bank funds of the borrowing firm, as a percentage of the total assets of the fund at that
time. This variable is measured over the interval -2 to +2 years around the deal date (where 0 depicts the date of the start of the deal as reported by Loan
Pricing Corporation (LPC)). A borrowing firm is defined as that firm which is borrowing from a bank that is affiliated to the fund. The observations are at the
fund-stock-quarter level. Stock Funds Only refers to the following CRSP mutual fund categories: AG, BL, GI, LG and TR. The dependent variable is Fraction
and the main explanatory variable is the Deal Affiliation Interaction which is the product of the Post Deal Dummy (taking a value of 1 in the post-deal period
and 0 otherwise) and an Affiliation Dummy which is 1 for bank-affiliated funds and is zero for control funds. The deal date which is attributed to the control
fund comes from the bank fund. If the control fund does not hold the stock of the firm to which the family of the bank fund is lending, we put Fraction equal to
zero. The other explanatory variables are defined in Appendix B. The tables contain results for specifications in which we do not control for clustering and those
where we control for clustering around the individual mutual funds. Style dummies are defined at the level of the investment objective category. ***, ** and *
denote significance levels of 1%, 5% and 10% respectively using heteroskedasticity robust standard errors.

Panels A and B contain the results for stacked regressions conducted using 1 or 5 controls for each bank fund, respectively. Panels C and D contain the results
of Fama-Macbeth (1973) regressions conducted using the stacked dataset with 1 or 5 control funds per bank fund. Cross-sections regressions are run for each
quarter and a time series of coefficients is generated for each of the explanatory variables. The table reports, for each explanatory variable, the mean of this
time-series and a t-test of significance to determine whether the time-series is significantly different from zero or not. The time period of the analysis is from Jan.
1993 to June 2004 (46 quarters).

52
 Table 5, Panel A: Stacked Regressions using 1 Control Fund per Bank Fund

All Categories Stock Funds Only Stock Funds Only Stock Funds Only
(TNA>$1 Mil.) (TNA>$1 Mil.) (TNA > $15 Mil.) (TNA > $50 Mil.)
Explanatory Variables (1) (2) (3) (4) (5) (6) (7) (8)

Deal Affiliation Interaction .00445*** .00445*** .00417*** .00417*** .00412 .00412*** .00416*** .00416***
(29.56) (6.50) (29.89) (6.05) (29.39) (5.97) (29.00) (6.19)
Lag Annual Return -.00216*** -.00216** -.00194*** -.00194* -.00198 -.00198* -.00131*** -.00131
(-6.49) (-2.24) (-5.97) (-1.91) (-6.03) (-1.94) (-3.96) (-1.36)
Total Net Assets -.00030*** -.00030 -.00027*** -.00027 -.00018 -.00018 -.00036*** -.00036
(-6.55) (-1.05) (-5.91) (-0.91) (-4.00) (-0.59) (-7.05) (-1.17)
Size of Fund Family -.00047*** -.00047 -.00047*** -.00047 -.00044 -.00044 -.00056*** -.00056
(-5.63) (-1.12) (-5.83) (-1.10) (-5.51) (-1.04) (-6.82) (-1.26)
Turnover -.00059*** -.00059* -.00031*** -.00031 -.00031 -.00031 -.00027*** -.00027
(-6.72) (-1.71) (-4.27) (-0.91) (-4.13) (-0.89) (-3.50) (-0.73)
Total Fees .00039*** .00039 .00070*** .00070 .00064 .00064 .00054*** .00054
(3.97) (0.90) (7.80) (1.57) (7.16) (1.45) (6.08) (1.22)
Assets Under Family Management -.00003 -.00003 -.00030*** -.00030 -.00039*** -.00039 -.00040*** -.00040
(-0.42) (-0.10) (-3.80) (-0.87) (-4.72) (-1.08) (-4.54) (-1.07)
Intercept .00280** .00280 .00505*** .00505 .00550 .00550 .00607*** .00607
(2.55) (0.81) (4.67) (1.44) (4.78) (1.38) (5.04) (1.45)

Clustering No Yes No Yes No Yes No Yes

Style Dummies Yes Yes Yes Yes Yes Yes Yes Yes
R-Squared 0.0817 0.0817 0.0642 0.0642 0.0618 0.0618 0.0667 0.0667
Obs. 25,912 25,912 24,140 24,140 23,880 23,880 22,742 22,742

53
 Table 5, Panel B: Stacked Regressions using 5 Control Funds per Bank Fund

All Categories Stock Funds Only Stock Funds Only Stock Funds Only
(TNA>$1 Mil.) (TNA>$1 Mil.) (TNA > $15 Mil.) (TNA > $50 Mil.)
Explanatory Variables (1) (2) (3) (4) (5) (6) (7) (8)

Deal Affiliation Interaction .00557*** .00557*** .00508*** .00508*** .00503*** .00503*** .00509*** .00509***
(38.35) (7.20) (40.09) (6.61) (39.53) (6.55) (39.10) (6.80)
Lag Annual Return -.00148*** -.00148*** -.00147*** -.00147*** -.00150*** -.00150*** -.00125*** -.00125***
(-11.82) (-3.90) (-11.61) (-3.69) (-11.70) (-3.77) (-9.65) (-3.21)
Total Net Assets -.00017*** -.00017 -.00013*** -.00013 -.00008*** -.00008 -.00017*** -.00017
(-7.27) (-1.43) (-5.51) (-1.05) (-3.39) (-0.63) (-6.89) (-1.37)
Size of Fund Family -.00005 -.00005 -.00005 -.00005 -.00002 -.00002 -.00002 -.00002
(-1.48) (-0.31) (-1.45) (-0.30) (-0.61) (-0.13) (-0.54) (-0.11)
Turnover -.00021*** -.00021** -.00017*** -.00017* -.00018*** -.00018* -.00022*** -.00022**
(-7.73) (-2.01) (-6.99) (-1.66) (-7.05) (-1.66) (-8.48) (-2.01)
Total Fees .00008 .00008 .00019*** .00019 .00018*** .00018 .00019*** .00019
(1.88) (0.43) (5.01) (1.08) (4.49) (0.94) (4.59) (0.98)
Assets Under Family Management .00015*** .00015 .00003 .00003 -.00003 -.00003 -.00008*** -.00008
(6.54) (1.54) (1.11) (0.28) (-1.20) (-0.30) (-2.69) (-0.71)
Intercept .00194*** .00194** .00187*** .00187** .00252*** .00252** .00292*** .00292***
(6.57) (2.05) (5.41) (2.05) (4.73) (2.13) (7.37) (2.62)

Clustering No Yes No Yes No Yes No Yes

Style Dummies Yes Yes Yes Yes Yes Yes Yes Yes
R-Squared 0.0705 0.0705 0.0600 0.0600 0.0586 0.0586 0.0605 0.0605
Obs. 76,725 76,725 71,316 71,316 70,647 70,647 67,250 67,250

54
 Table 5, Panel C: Fama-Macbeth Regressions using Bank Funds and 1 Control Fund per Bank Fund

All Categories Stock Funds Only Stock Funds Only Stock Funds Only
(TNA > $1 Mil.) (TNA > $1 Mil.) (TNA > $15 Mil.) (TNA > $50 Mil.)
Explanatory Variables (1) (2) (3) (4) (5) (6) (7) (8)

Deal Affiliation Interaction .00379*** .00378*** .00361*** .00352*** .00362*** .00353*** .00378*** .00363***
(9.98) (10.05) (10.60) (10.40) (11.18) (10.92) (11.95) (11.58)
Lag Annual Return -.00159 -.00430 -.00268 -.00428 -.00361 -.00673 -.01065 -.01308
(-0.24) (-0.54) (-0.40) (-0.54) (-0.50) (-0.75) (-0.82) (-0.89)
Total Net Assets .00012 .00039 .00034 .00031 .00043 .00037 .00069 .00057
(0.35) (1.14) (1.03) (0.91) (1.31) (1.09) (1.59) (1.27)
Size of Fund Family .00001 .00031 .00017 -.00004 .00024 -.00002 .00017 -.00014
(0.01) (0.44) (0.28) (-0.05) (0.38) (-0.02) (0.27) (-0.20)
Turnover .00122 .00120 .00145* .00137 .00146* .00133 .00139 .00116
(1.52) (1.24) (1.82) (1.42) (1.83) (1.37) (1.60) (1.10)
Total Fees .00124* .00076 .00131** .00091 .00129* .00078 .00127* .00062
(1.92) (1.11) (2.01) (1.34) (1.94) (1.15) (1.85) (0.93)
Assets Under Family Management .00015 .00037 -.00003 .00005 -.00017 -.00007 -.00030 -.00017
(0.48) (1.08) (-0.10) (0.14) (-0.52) (-0.21) (-0.90) (-0.48)

Style Dummies No Yes No Yes No Yes No Yes

Obs. 46 46 46 46 46 46 46 46

55
 Table 5, Panel D: Fama-Macbeth Regressions using Bank Funds and 5 Control Funds per Bank Fund

All Categories Stock Funds Only Stock Funds Only Stock Funds Only
(TNA > $1 Mil.) (TNA > $1 Mil.) (TNA > $15 Mil.) (TNA > $50 Mil.)
Explanatory Variables (1) (2) (3) (4) (5) (6) (7) (8)

Deal Affiliation Interaction .00502*** .00494*** .00474*** .00468*** .00471*** .00467*** .00470*** .00467***
(12.21) (11.67) (12.19) (11.71) (12.02) (11.77) (11.74) (11.88)
Lag Annual Return -.00230* -.00235** -.00216* -.00191* -.00228 -.00194* -.00223 -.00150
(-1.81) (-2.11) (-1.67) (-1.92) (-1.60) (-1.86) (-1.49) (-1.31)
Total Net Assets -.00010 -.00027 -.00003 -.00030 .00006 -.00023 .00017 -.00022
(-0.93) (-0.95) (-0.25) (-1.06) (0.52) (-0.83) (1.18) (-0.76)
Size of Fund Family .00041** .00051** .00046** .00046** .00047** .00047** .00045** .00045**
(1.96) (2.53) (2.28) (2.25) (2.34) (2.31) (2.17) (2.17)
Turnover -.00021** -.00017* -.00016* -.00016* -.00014 -.00013* -.00011 -.00011
(-2.22) (-1.89) (-1.82) (-1.84) (-1.65) (-1.68) (-1.02) (-1.19)
Total Fees .00010 -.00002 .00017 .00010 .00016 .00006 .00010 .00005
(0.64) (-0.14) (1.06) (0.60) (0.94) (0.38) (0.60) (0.27)
Assets Under Family Management .00028* .00037*** .00027* .00030** .00026* .00029** .00018 .00021
(1.95) (2.67) (1.83) (2.18) (1.74) (2.04) (1.12) (1.36)

Style Dummies No Yes No Yes No Yes No Yes

Obs. 46 46 46 46 46 46 46 46

56
 Table 6: Change in Fraction Around Deal Date: Multivariate Results Controlling for Affiliation

This table presents results of multivariate regressions for changes in Fraction around the deal date for bank funds and control funds, where the bank funds and
control funds data have been stacked. Bank Funds are defined as those mutual funds which belong to a fund family that also owns a bank. Control funds are
those funds which do not belong to a fund family which owns a bank and which have been matched on a yearly basis with the bank funds on the basis of
investment objective, total net assets of the fund, total net assets of the fund family and fund return over the previous year. To be chosen as a control fund, the
fund must belong to the same investment objective as the bank fund and must have the smallest absolute percentage difference (computed as the sum of the
absolute percentage difference for total net assets of the fund, assets under family management and fund return over the previous year) with respect to the bank
fund. In this manner, we are able to pick out 1 to 5 closest control funds for each bank fund.

At any point in time, Fraction is defined as the stock holding by the bank funds of the borrowing firm, as a percentage of the total assets of the fund at that
time. This variable is measured over the interval -2 to +2 years around the deal date (where 0 depicts the date of the start of the deal as reported by Loan
Pricing Corporation (LPC)). A borrowing firm is defined as that firm which is borrowing from a bank that is affiliated to the fund. The observations are at the
fund-stock-quarter level. Stock Funds Only refers to the following CRSP mutual fund categories: AG, BL, GI, LG and TR. The dependent variable is Fraction
and the main explanatory variable is the Deal Affiliation Interaction which is the product of the Post Deal Dummy (taking a value of 1 in the post-deal period
and 0 otherwise) and an Affiliation Dummy which is 1 for bank-affiliated funds and is zero for control funds. The deal date which is attributed to the control
fund comes from the bank fund. If the control fund does not hold the stock of the firm to which the family of the bank fund is lending, we put Fraction equal to
zero. The other explanatory variables are defined in Appendix B. The tables contain results for specifications in which we do not control for clustering and those
where we control for clustering around the individual mutual funds. Style dummies are defined at the level of the investment objective category. ***, ** and *
denote significance levels of 1%, 5% and 10% respectively using heteroskedasticity robust standard errors.

Panels A and B contain the results for stacked regressions conducted using 1 or 5 controls for each bank fund, respectively. The time period of the analysis is
from Jan. 1993 to June 2004.

57
 Table 6, Panel A: Stacked Regressions using 1 control fund per bank fund

All Categories Stock Funds Only Stock Funds Only Stock Funds Only
(TNA>$1 Mil.) (TNA>$1 Mil.) (TNA > $15 Mil.) (TNA > $50 Mil.)
Explanatory Variables (1) (2) (3) (4) (5) (6) (7) (8)

Affiliation Dummy .00634*** .00634*** .00608*** .00608*** .00596*** .00596*** .00593*** .00593***
(46.79) (9.34) (45.92) (8.52) (45.14) (8.45) (44.79) (8.73)
Deal Affiliation Interaction .00067*** .00067** .00059*** .00059** .00062*** .00062** .00067*** .00067**
(3.75) (2.19) (3.74) (2.06) (3.89) (2.11) (4.09) (2.07)
Lag Annual Return -.00245*** -.00245** -.00218*** -.00218** -.00221*** -.00221** -.00145*** -.00145
(-7.65) (-2.52) (-7.04) (-2.14) (-7.07) (-2.17) (-4.60) (-1.54)
Total Net Assets -.00029*** -.00029 -.00027*** -.00027 -.00019*** -.00019 -.00040*** -.00040
(-6.76) (-0.97) (-6.32) (-0.87) (-4.33) (-0.57) (-8.12) (-1.27)
Size of Fund Family -.00079*** -.00079* -.00076*** -.00076* -.00075*** -.00075* -.00085*** -.00085*
(-9.93) (-1.81) (-9.73) (-1.72) (-9.54) (-1.67) (-10.65) (-1.82)
Turnover -.00025*** -.00025 -.000002 -.000002 -0.000001 -0.000001 .0000001 .0000001
(-2.96) (-0.85) (-0.02) (-0.01) (-0.01) (-0.00) (0.00) (0.00)
Total Fees .00162*** .00162*** .00194*** .00194*** .00188*** .00188*** .00180*** .00180***
(16.10) (3.52) (20.74) (4.10) (20.16) (4.02) (19.48) (3.79)
Assets Under Family Management -.00022*** -.00022 -.00042*** -.00042 -.00051*** -.00051 -.00046*** -.00046
(-3.16) (-0.75) (-5.56) (-1.27) (-6.49) (-1.49) (-5.64) (-1.36)
Intercept .00010 .00010 .00164 .00164 .00211* .00211 .00221* .00221
(0.08) (0.03) (1.53) (0.46) (1.68) (0.52) (1.70) (0.52)

Clustering No Yes No Yes No Yes No Yes

Style Dummies Yes Yes Yes Yes Yes Yes Yes Yes
R-Squared 0.1523 0.1523 0.1519 0.1519 0.1470 0.1470 0.1504 0.1504
Obs. 25,912 25,912 24,140 24,140 23,880 23,880 22,742 22,742

58
 Table 6, Panel B: Stacked Regressions using 5 control funds per bank fund

All Categories Stock Funds Only Stock Funds Only Stock Funds Only
(TNA>$1 Mil.) (TNA>$1 Mil.) (TNA > $15 Mil.) (TNA > $50 Mil.)
Explanatory Variables (1) (2) (3) (4) (5) (6) (7) (8)

Affiliation Dummy .00569*** .00569*** .00535*** .00535*** .00529*** .00529*** .00529*** .00529***
(47.02) (8.74) (46.22) (8.14) (45.85) (8.14) (45.41) (8.46)
Deal Affiliation Interaction .00076*** .00076** .00057*** .00057* .00059*** .00059** .00065*** .00065**
(4.14) (2.37) (3.57) (1.93) (3.69) (1.97) (3.98) (2.01)
Lag Annual Return -.00170*** -.00170*** -.00170*** -.00170*** -.00174*** -.00174*** -.00146*** -.00146***
(-13.90) (-4.33) (-13.79) (-4.14) (-13.95) (-4.24) (-11.62) (-3.73)
Total Net Assets -.00014*** -.00014 -.00010*** -.00010 -.00006** -.00006 -.00017*** -.00017
(-6.16) (-1.08) (-4.49) (-0.77) (-2.54) (-0.42) (-6.90) (-1.30)
Size of Fund Family -.00026*** -.00026 -.00026*** -.00026 -.00023*** -.00023 -.00024*** -.00024
(-7.31) (-1.29) (-7.18) (-1.27) (-6.53) (-1.15) (-6.55) (-1.14)
Turnover -.00006** -.00006 -.00004 -.00004 -.00005* -.00005 -.00009*** -.00009
(-2.32) (-0.62) (-1.53) (-0.37) (-1.86) (-0.45) (-3.44) (-0.85)
Total Fees .00061*** .00061*** .00072*** .00072*** .00072*** .00072*** .00073*** .00073***
(14.99) (3.01) (17.71) (3.43) (17.80) (3.31) (17.78) (3.31)
Assets Under Family Management .00003 .00003 -.00008*** -.00008 -.00015*** -.00015 -.00018*** -.00018
(1.21) (0.28) (-3.19) (-0.78) (-5.95) (-1.44) (-6.21) (-1.64)
Intercept .00171*** .00171* .00122*** .00122 .00242*** .00242* .00232*** .00232*
(5.87) (1.81) (3.38) (1.12) (4.09) (1.71) (5.69) (1.89)

Clustering No Yes No Yes No Yes No Yes

Style Dummies Yes Yes Yes Yes Yes Yes Yes Yes
R-Squared 0.1159 0.1159 0.1095 0.1095 0.1074 0.1074 0.1087 0.1087
Obs. 76,725 76,725 71,316 71,316 70,647 70,647 67,250 67,250

59
 Table 7: “Net of Style” Pooled Return Regressions

This table presents results of “net of style” pooled return regressions on a Bank Fund Dummy and
other control variables. “Net of style” return is computed by subtracting the average monthly return
of the entire relevant CRSP investment objective category from each of the monthly fund returns in
question.

Bank Funds are defined as those mutual funds which belong to a fund family that also owns a bank.
Control funds are those funds which do not belong to a fund family which owns a bank and which
have been matched on a yearly basis with the bank funds on the basis of investment objective, total
net assets of the fund, total net assets of the fund family and fund return over the previous year. To
be chosen as a control fund, the fund must belong to the same investment objective as the bank fund
and must have the smallest absolute percentage difference (computed as the sum of the absolute
percentage difference for total net assets of the fund, assets under family management and fund
return over the previous year) with respect to the bank fund. In this manner, we are able to pick out
1 or 5 closest control funds for each bank fund.

Only the time period after the deal announcement date is considered. The Bank Fund Dummy takes
a value of 1 for Bank Funds and a value of 0 for control funds. The Cumulative Fraction variable
must be positive for the bank funds to be included in the analysis. At any point in time, Fraction is
defined as the stock holding by the bank funds of the borrowing firm, as a percentage of the total
assets of the fund at that time. Cumulative Fraction is then the sum of Fraction for a given quarter.
During this time, if the fund is reported to have non-zero Cumulative Fraction, for example, quarters
1 and 3 but not in 2, Cumulative Fraction for quarter 2 is interpolated. Nothing is done if
Cumulative Fraction is zero for two consecutive quarters. The bank and control fund data are
stacked. To be included in the sample, total net assets of the fund must exceed at least $15 million,
fund age must exceed 1 year, the fund must start holding the stock within two years of deal
commencement. Multiple classes of the same fund have been removed. Stock Funds Only refers to
the following CRSP mutual fund categories: AG, BL, GI, LG and TR.

Panels A, B, C and D contain the results for pooled regressions conducted using 1 or 5 controls for
each bank fund, respectively. The time period of the analysis is from Jan. 1993 to June 2004. All
panels contain results for specifications in which we do not control for clustering and those where we
control for clustering around the individual mutual funds. Observations are defined at the fund-
month level. Although the main explanatory variables are defined in Appendix B, here we define two
additional control variables which are labeled as Small Fund Interaction and Large Fund
Interaction. Small Fund Interaction is the interaction between a size dummy which takes a value of
1 if the total net assets of the fund lie in the range of $15-$50 million, and the Bank Fund Dummy
defined above. Large Fund Interaction is the interaction between a size dummy which takes a value
of 1 if the total net assets of the fund exceed $2 billion, and the Bank Fund Dummy defined above.
Panels also contain specifications with the three Fama-French factors and the Carhart (1997)
momentum factor, as controls. ***, ** and * denote significance levels of 1%, 5% and 10%
respectively using heteroskedasticity robust standard errors.

60
 Table 7, Panel A: Pooled Regressions using 1 Control Fund per Bank Fund
& TNA>$15 million

Dep. Var. = Net of Style Returns

Explanatory Variables (1) (2) (3) (4)
Coeff. (T-Stat.) Coeff. (T-Stat.) Coeff. (T-Stat.) Coeff. (T-Stat.)
Bank Fund Dummy .00144** (2.34) .00144** (1.98) .00147** (2.38) .00147** (2.02)
Small Fund Interaction -.00690*** (-3.25) -.00690* (-1.80) -.00699*** (-3.32) -.00699* (-1.85)
Large Fund Interaction -.00303** (-2.48) -.00303** (-2.32) -.00310** (-2.52) -.00310** (-2.38)
Total Net Assets .00016 (0.56) .00016 (0.45) .00016 (0.58) .00016 (0.47)
Size of the Fund Family -.00130*** (-2.84) -.00130** (-2.11) -.00137*** (-2.98) -.00137** (-2.24)
Turnover .00171*** (2.97) .00171* (1.90) .00172*** (3.01) .00172* (1.92)
Total Fees .00031 (0.69) .00031 (0.50) .00038 (0.83) .00038 (0.61)
Assets Under Family
Management -.00011 (-0.35) -.00011 (-0.28) -.00010 (-0.32) -.00010 (-0.26)
Market .02639*** (3.55) .02639*** (2.67)
SMB -.00874 (-0.81) -.00874 (-0.51)
HML .02073* (1.88) .02073 (0.79)
Momentum -.00001 (-0.00) -.00001 (-0.00)
Intercept -0.00144 (-0.38) -0.00144 (-0.31) -.00187 (-0.49) -.00187 (-0.41)

Clustering No Yes No Yes

R-Squared 0.0048 0.0048 0.0071 0.0071
Obs. 8,550 8,550 8,550 8,550

Table 7, Panel B: Pooled Regressions using 1 Control Fund per Bank Fund
& TNA>$50 million

Dep. Var. = Net of Style Returns

Explanatory Variables (1) (2) (3) (4)
Coeff. (T-Stat.) Coeff. (T-Stat.) Coeff. (T-Stat.) Coeff. (T-Stat.)
Bank Fund Dummy .00146** (2.32) .00146** (1.99) .00147** (2.35) .00147** (2.02)
Large Fund Interaction -.00310** (-2.49) -.00310** (-2.35) -.00314** (-2.52) -.00314** (-2.41)
Total Net Assets .00021 (0.72) 0.00021 (0.60) .00022 (0.72) .00022 (0.60)
Size of the Fund Family -.00106** (-2.25) -.00106* (-1.76) -.00115** (-2.45) -.00115* (-1.94)
Turnover .00161*** (2.66) .00161* (1.69) .00163*** (2.70) .00163* (1.71)
Total Fees .00035 (0.73) 0.00035 (0.54) .00042 (0.88) .00042 (0.66)
Assets Under Family
Management -.00021 (-0.63) -0.00021 (-0.53) -.00016 (-0.48) -.00016 (-0.41)
Market .02379*** (3.10) .02379** (2.32)
SMB -.01372 (-1.24) -.01372 (-0.78)
HML .00721 (0.65) .00721 (0.27)
Momentum -.000003 (-0.00) -.000003 (-0.00)
Intercept -.00070 (-0.17) -0.0007 (-0.14) -.00141 (-0.35) -.00141 (-0.30)

Clustering No Yes No Yes

R-Squared 0.0029 0.0029 0.0049 0.0049
Obs. 8,133 8,133 8,133 8,133

61
 Table 7, Panel C: Pooled Regressions using 5 Control Fund per Bank Fund
& TNA>$15 million

Dep. Var. = Net of Style Returns

Explanatory Variables (1) (2) (3) (4)
Coeff. (T-Stat.) Coeff. (T-Stat.) Coeff. (T-Stat.) Coeff. (T-Stat.)
Bank Fund Dummy .00110** (2.46) .00110** (1.97) .00113** (2.52) .00113** (2.02)
Small Fund Interaction -.00521*** (-2.85) -0.00521 (-1.54) -.00527*** (-2.92) -.00527 (-1.59)
Large Fund Interaction -.00345*** (-3.11) -.00345*** (-2.89) -.00347*** (-3.07) -.00347*** (-2.92)
Total Net Assets .00058*** (3.78) .00058*** (2.58) .00058*** (3.80) .00058*** (2.61)
Size of the Fund Family -.00099*** (-3.86) -.00099** (-2.40) -.00107*** (-4.20) -.00107*** (-2.62)
Turnover .00114*** (4.63) .00114*** (3.00) .00116*** (4.76) .00116*** (3.06)
Total Fees .00003 (0.13) 0.00003 (0.08) .00010 (0.40) .00010 (0.24)
Assets Under Family
Management -.00008 (-0.53) -0.00008 (-0.38) -.00007 (-0.48) -.00007 (-0.35)
Market .02166*** (4.78) .02166** (2.56)
SMB -.02098*** (-3.37) -.02098 (-1.61)
HML .01987*** (2.93) .01987 (0.96)
Momentum -.00955** (-2.46) -.00955 (-0.96)
Intercept -.00325* (-1.84) -0.00325 (-1.37) -.00344* (-1.93) -.00344 (-1.47)

Clustering No Yes No Yes

R-Squared 0.0032 0.0032 0.0079 0.0079
Obs. 26,163 26,163 26,163 26,163

Table 7, Panel D: Pooled Regressions using 5 Control Fund per Bank Fund
& TNA>$50 million

Dep. Var. = Net of Style Returns

Explanatory Variables (1) (2) (3) (4)
Coeff. (T-Stat.) Coeff. (T-Stat.) Coeff. (T-Stat.) Coeff. (T-Stat.)
Bank Fund Dummy .00112** (2.50) .00112** (1.99) .00115** (2.56) .00115** (2.05)
Large Fund Interaction -.00357*** (-3.19) -.00357*** (-2.93) -.00358*** (-3.17) -.00358*** (-2.97)
Total Net Assets .00065*** (3.80) .00065** (2.55) .00064*** (3.79) .00064** (2.53)
Size of the Fund Family -.00097*** (-3.72) -.00097** (-2.29) -.00106*** (-4.07) -.00106** (-2.52)
Turnover .00117*** (4.70) .00117*** (3.03) .00119*** (4.83) .00119*** (3.10)
Total Fees .00001 (0.06) 0.00001 (0.03) .00009 (0.35) .00009 (0.21)
Assets Under Family
Management -.00014 (-0.84) -0.00014 (-0.60) -.00012 (-0.68) -.00012 (-0.50)
Market .02324*** (4.99) .02324*** (2.64)
SMB -.02230*** (-3.51) -.02230* (-1.68)
HML .01385** (2.03) .01385 (0.65)
Momentum -.00728* (-1.85) -.00728 (-0.71)
Intercept -.00301 (-1.52) -0.00301 (-1.12) -.00337* (-1.68) -.00337 (-1.25)

Clustering No Yes No Yes

R-Squared 0.0028 0.0028 0.0070 0.0070
Obs. 24,836 24,836 24,836 24,836

62
 Table 8: “Net of Style” Fama-Macbeth Return Regressions

This table presents results of “net of style” Fama-Macbeth (1973) return regressions on a Bank Fund
Dummy and other control variables. “Net of style” return is computed by subtracting the average
monthly return of the entire relevant CRSP investment objective category from each of the monthly
fund returns in question.

Bank Funds are defined as those mutual funds which belong to a fund family that also owns a bank.
Control funds are those funds which do not belong to a fund family which owns a bank and which
have been matched on a yearly basis with the bank funds on the basis of investment objective, total
net assets of the fund, total net assets of the fund family and fund return over the previous year. To
be chosen as a control fund, the fund must belong to the same investment objective as the bank fund
and must have the smallest absolute percentage difference (computed as the sum of the absolute
percentage difference for total net assets of the fund, assets under family management and fund
return over the previous year) with respect to the bank fund.

Only the time period after the deal announcement date is considered in this analysis and the Bank
Fund Dummy takes a value of 1 for Bank Funds and a value of 0 for control funds. The Cumulative
Fraction variable must be positive for the bank funds to be included in the analysis. At any point in
time, Fraction is defined as the stock holding by the bank funds of the borrowing firm, as a
percentage of the total assets of the fund at that time. Cumulative Fraction is then simply the sum
of Fraction for a given quarter. During this time, if the fund is reported to have non-zero Cumulative
Fraction, for example, quarters 1 and 3 but not in 2, Cumulative Fraction for quarter 2 is
interpolated. Nothing is done if Cumulative Fraction is zero for two consecutive quarters. The bank
and control fund data are stacked. Stock Funds Only refers to the following CRSP mutual fund
categories: AG, BL, GI, LG and TR.

Both Panels A and B contain results for Fama-Macbeth (1973) regressions conducted with up to 5
controls for each bank fund. Panel A includes funds with sizes lying in the range of $15-$50 million
while Panel B focuses only on those funds which have size greater than $50 million. We conduct
cross-sectional regressions for each month and generate a time series of coefficients for each of the
explanatory variables. The table reports, for each explanatory variable, the mean of this time-series
and a t-test of significance to determine whether the time-series is significantly different from zero or
not. The time period of the analysis is from Jan. 1993 to June 2004. Although the main explanatory
variables are defined in Appendix B, here we define two additional control variables which are
labeled as Small Fund Interaction and Large Fund Interaction. Small Fund Interaction is the
interaction between a size dummy which takes a value of 1 if the total net assets of the fund lie in
the range of $15-$50 million, and the Bank Fund Dummy defined above. Large Fund Interaction is
the interaction between a size dummy which takes a value of 1 if the total net assets of the fund
exceed $2 billion, and the Bank Fund Dummy defined above. Panels A, B and C also contain, in
some specifications, the three Fama-French factors and the Carhart (1997) momentum factor, as
controls. Style dummies are defined at the level of the investment objective category. ***, ** and *
denote significance levels of 1%, 5% and 10% respectively using heteroskedasticity robust standard
errors.

63
 Table 8, Panel A: Fama-Macbeth Regressions using 5 Control Funds per Bank Fund
& TNA>$15 million
Dep. Var. = Raw Returns Dep. Var. =
Net of Style Returns
Explanatory Variables (1) (2) (3)

Bank Fund Dummy .00180*** .00185*** .00167***

(3.08) (3.52) (3.13)
Small Fund Interaction -.00314 -.00304* -.00263
(-1.63) (-1.88) (-1.60)
Large Fund Interaction -.00161 -.00188* -.00195*
(-1.49) (-1.85) (-1.85)
Total Net Assets .00036 .00051* .00052*
(1.14) (1.93) (1.74)
Size of Fund Family -.00129*** -.00122*** -.00115***
(-3.37) (-3.65) (-3.37)
Turnover .00035 .00030 .00037
(0.68) (0.68) (0.86)
Total Fees .00059 .00037 .00029
(0.92) (0.81) (0.63)
Assets Under Family Management -.00039* -.00040** -.00040**
(-1.71) (-2.10) (-2.15)

Style Dummies No Yes No

Obs. 134 134 134

Table 8, Panel B: Fama-Macbeth Regressions using 5 Control Funds per Bank Fund
& TNA>$50 million
Dep. Var. = Raw Returns Dep. Var. =
Net of Style Returns
Explanatory Variables (1) (2) (3)

Bank Fund Dummy .00190*** .00190*** .00170***

(3.34) (3.46) (3.20)
Large Fund Interaction -.00193* -.00210** -.00228**
(-1.79) (-2.11) (-2.21)
Total Net Assets .00067* .00069** .00080***
(1.79) (2.18) (2.66)
Size of Fund Family -.00128*** -.00124*** -.00113***
(-3.22) (-3.32) (-3.16)
Turnover .00042 .00035 .00042
(0.84) (0.81) (1.01)
Total Fees .00053 .00034 .00022
(0.81) (0.73) (0.47)
Assets Under Family Management -.00047* -.00051** -.00042*
(-1.68) (-2.16) (-1.90)

Style Dummies No Yes No

Obs. 134 134 134

64
 Table 9: Results for Calendar Time Regressions

The tables below present the results for calendar time portfolio regressions using both equal- and
value-weighted portfolios. The portfolio is constructed by going long in each bank fund which
announces the holding of a stock to which its affiliated bank is lending and short in its
corresponding control fund in the quarter following the one in which the fund reports to be holding
the stock. This position is held for a period of 6 months after which both the bank and the control
fund is dropped from the portfolio. Bank Funds are defined as those mutual funds which belong to
a fund family that also owns a bank. Control funds are those funds which do not belong to a fund
family which owns a bank and which have been matched on a yearly basis with the bank funds on
the basis of investment objective, total net assets of the fund, total net assets of the fund family
and fund return over the previous year. To be chosen as a control fund, the fund must belong to
the same investment objective as the bank fund and must have the smallest absolute percentage
difference (computed as the sum of the absolute percentage difference for total net assets of the
fund, assets under family management and fund return over the previous year) with respect to the
bank fund. Only those bank funds are included in the analysis for which a control fund has been
identified. In addition, stocks should comprise more than 85% of the funds’ portfolio while bonds
should not comprise more than 2% of the portfolio (which excludes approximately the top 2.5% of
funds ranked in terms of bond holdings). To be included in the sample, total net assets of the fund
must exceed at least $1 million, fund age must exceed 1 year, the fund must start holding the
stock within two years of deal commencement. Stock Funds Only refers to the following CRSP
mutual fund categories: AG, BL, GI, LG and TR. Multiple classes of the same fund have not been
collapsed since returns are averaged. The tables contain the results for the one factor model (i.e.
the market model), the Fama-French 3 factor model (Fama and French (1993)) and the 4 factor
model (i.e. augmenting the 3 factor model with the momentum factor of Carhart (1997)). ***, **
and * denote significance levels of 1%, 5% and 10% respectively using heteroskedasticity robust
standard errors. The time period for the analysis is from Jan. 1993 to June 2004.

Table 9, Panel A: Stock Funds with TNA > $1 million

(One Factor Model)

Equally-Weighted Portfolios Value-Weighted Portfolios
Coeff. T-Stat Coeff. T-Stat
α 0.00178 3.29*** 0.00269 3.98***
βRm-Rf 0.01421 0.99 0.02298 1.53
Obs. 137 137
(Three Factor Model)
Equally-Weighted Portfolios Value-Weighted Portfolios
Coeff. T-Stat Coeff. T-Stat
α 0.00171 3.38*** 0.00258 3.68***
βRm-Rf 0.01651 0.99 0.03181 1.70*
βSmB 0.00895 0.57 -0.00792 -0.38
βHmL 0.0081 0.33 0.01654 0.63
Obs. 137 137
(Four Factor Model)
Equally-Weighted Portfolios Value-Weighted Portfolios
Coeff. T-Stat Coeff. T-Stat
α 0.00145 2.75*** 0.00255 3.53***
βRm-Rf 0.02522 1.42 0.03289 1.64
βSmB 0.00422 0.26 -0.00851 -0.41
βHmL 0.01243 0.52 0.01708 0.64
βUmD 0.02284 1.69* 0.00283 0.20
Obs. 137 137

65
 Table 9, Panel B: Stock Funds with TNA > $15 million

(One Factor Model)

Equally-Weighted Portfolios Value-Weighted Portfolios
Coeff. T-Stat Coeff. T-Stat
α 0.00176 3.34*** 0.00269 3.97***
βRm-Rf 0.01009 0.88 0.02293 1.53
Obs. 137 137
(Three Factor Model)
Equally-Weighted Portfolios Value-Weighted Portfolios
Coeff. T-Stat Coeff. T-Stat
α 0.00167 3.31*** 0.00259 3.66***
βRm-Rf 0.01458 1.01 0.03183 1.69*
βSmB 0.00414 0.25 -0.00811 -0.39
βHmL 0.01122 0.48 0.01662 0.63
Obs. 137 137
(Four Factor Model)
Equally-Weighted Portfolios Value-Weighted Portfolios
Coeff. T-Stat Coeff. T-Stat
α 0.00143 2.73*** 0.00256 3.52***
βRm-Rf 0.02268 1.46 0.03283 1.64
βSmB -0.00026 -0.01 -0.00865 -0.41
βHmL 0.01525 0.65 0.01712 0.64
βUmD 0.02123 1.63 0.00262 0.19
Obs. 137 137

Table 9, Panel C: Stock Funds with TNA > $50 million

(One Factor Model)

Equally-Weighted Portfolios Value-Weighted Portfolios
Coeff. T-Stat Coeff. T-Stat
α 0.00186 3.20*** 0.00275 3.94***
βRm-Rf 0.00496 0.42 0.02229 1.45
Obs. 137 137
(Three Factor Model)
Equally-Weighted Portfolios Value-Weighted Portfolios
Coeff. T-Stat Coeff. T-Stat
α 0.0019 3.36*** 0.00266 3.64***
βRm-Rf 0.00826 0.58 0.03107 1.62
βSmB -0.02437 -1.41 -0.01042 -0.49
βHmL -0.00122 -0.05 0.01557 0.59
Obs. 137 137
(Four Factor Model)
Equally-Weighted Portfolios Value-Weighted Portfolios
Coeff. T-Stat Coeff. T-Stat
α 0.00169 3.04*** 0.00264 3.52***
βRm-Rf 0.01513 0.96 0.03169 1.55
βSmB -0.02810 -1.64 -0.01075 -0.51
βHmL 0.00220 0.09 0.01588 0.59
βUmD 0.01802 1.66* 0.00164 0.12
Obs. 137 137

66
 Table 10: Borrowing Firm Performance in the Post-Deal Period

This table presents the results for the performance of borrowing firms in the period
after the deal. We subdivide borrowing firms into “winner” and “loser” firms. “Winner” firms
are defined as those firms for which bank funds increase Fraction in the period after the deal
in comparison to its level in the period before the deal. “Loser” firms are defined as those
firms for which bank funds decrease Fraction in the period after the deal, in comparison to its
level before the deal. At any point in time, Fraction is defined as the market value of the
stock holding by the bank funds of the borrowing firm, as a percentage of the total assets of
the fund at that time. Bank Funds are defined as those mutual funds which belong to a fund
family that also owns a bank. The changes in Fraction are measured in the (-1, +1) year
window around the deal initiation date. The post announcement performance is measured
using two different methodologies: the returns across time and securities (RATS) method of
Ibbotson (1975) (reported in Panel A) and the calendar time portfolio regressions approach
(reported in Panel B).

Table 10, Panel A: Returns Across Time and Securities (RATS)

This panel presents the monthly cumulative average abnormal returns for borrowing
firms obtained using Ibbotson’s (1975) RATS method combined with the Fama-French (1993)
three-factor model and the Carhart (1997) four-factor model. The event date is the deal
initiation date, taken from the LPC database. The numbers reported are the sums of the
intercepts of cross-sectional regressions over the relevant time periods expressed in percentage
terms. Number of observations for each column are given in parentheses. ***, ** and * denote
significance levels of 1, 5 and 10% respectively using two-tailed tests.

3 Factor Model 4 Factor Model

Winner Stocks Loser Stocks Winner Stocks Loser Stocks
Months (743) (205) (743) (205)
(+1,+1) 0.90%* -2.47%** 0.77% -1.92%*
(+1,+2) 2.28%*** -0.35% 2.50%*** 0.48%
(+1,+3) 2.30%*** -0.15% 2.68%*** 1.11%
(+1,+4) 2.80%*** 0.03% 3.18%*** 1.22%
(+1,+5) 2.92%*** -1.20% 3.32%*** 0.22%
(+1,+6) 3.45%*** -2.28% 3.99%*** -0.40%
(+1,+7) 3.99%*** -2.40% 4.76%*** -0.08%
(+1,+8) 3.54%** -2.96% 4.83%*** -0.55%
(+1,+9) 3.05%** -4.36% 5.43%*** -2.10%
(+1,+10) 3.38%** -3.63% 5.81%*** -0.73%
(+1,+11) 3.30%* -3.56% 5.80%*** -0.09%
(+1,+12) 3.19%* -4.31% 5.98%*** -0.59%

67
 Table 10, Panel B: Calendar Time Portfolio Regressions (CTPR)

This panel presents the results for long term performance of the borrowing firms using
the CTPR approach. The dependent variable is the monthly returns on a portfolio which goes
long in the “winner” stocks and short in the “loser” stocks in the month following the
initiation of the deal. Each stock is kept in the portfolio for a period of 6 months after which
it is dropped. Abnormal returns are measured using the intercept of time-series regressions
conducted using the market model, the Fama-French (1993) three-factor model and the
Carhart (1997) four-factor model. In case of value-weighted portfolios, we use the market
value of the stock from the previous month as its weight in the portfolio. In addition to the
coefficients, the table contains t-statistics calculated using heteroskedasticity robust standard
errors. ***, ** and * denote significance at the 1, 5 and 10% levels respectively.

(One Factor Model)

Equally-Weighted Portfolios Value-Weighted Portfolios
Coeff. T-Stat Coeff. T-Stat
α 0.01291 2.54** 0.01786 2.86***
βRm-Rf -0.35791 -3.89*** -0.40146 -3.02***

Obs. 125 125

(Three Factor Model)

Equally-Weighted Portfolios Value-Weighted Portfolios
Coeff. T-Stat Coeff. T-Stat
α 0.01265 2.68*** 0.01934 3.02***
βRm-Rf -0.20407 -1.96** -0.32613 -2.59**
βSmB -0.52537 -3.77*** -0.75857 -3.43***
βHmL 0.15571 0.96 -0.09376 -0.43

Obs. 125 125

(Four Factor Model)

Equally-Weighted Portfolios Value-Weighted Portfolios
Coeff. T-Stat Coeff. T-Stat
α 0.00981 2.09** 0.01731 2.83***
βRm-Rf -0.09909 -0.89 -0.25117 -1.76*
βSmB -0.56768 -3.92*** -0.78877 -3.52***
βHmL 0.22347 1.52 -0.04538 -0.23
βUmD 0.24603 2.81*** 0.17566 1.77*

Obs. 125 125

68
 Table 11: Post-Deal Borrowing Firm Performance Conditional on
Amount of Insider Information

This table presents the results for the performance of borrowing firms in the period after the
deal conditional on the amount of insider information available to the lenders at the time of
the deal initiation using Ibbotson’s (1975) RATS method combined with the Fama-French
(1993) three-factor model and the Carhart (1997) four-factor model. We subdivide borrowing
firms into “winner” and “loser” firms. “Winner” firms are defined as those firms for which
bank funds increase Fraction in the period after the deal in comparison to its level in the
period before the deal (Panel A). “Loser” firms are defined as those firms for which bank
funds decrease Fraction in the period after the deal, in comparison to its level before the deal
(Panel B). Each panel is further subdivided on the amount of insider information. The ratio of
deal size to the market capitalization of the firm is used as the proxy for the amount of
insider information. “High Stake” firms (firms with more insider information) are defined as
those firms for which the ratio of deal size and the firm’s market capitalization at the end of
the previous calendar year lies above the median. “Low Stake” firms (firms with less insider
information) are those firms which lie below the median in this dimension. Deal size is
measured using the Deal Amount variable from the Loan Pricing Corporation (LPC)
database. At any point in time, Fraction is defined as the market value of the stock holding
by the bank funds of the borrowing firm, as a percentage of the total assets of the fund at
that time. Bank Funds are defined as those mutual funds which belong to a fund family that
also owns a bank. The changes in Fraction are measured in the (-1, +1) year window around
the deal initiation date. The table presents the monthly cumulative average abnormal returns
for borrowing firms in the post-deal period for up to 12 months after the deal’s initiation. The
event date is the deal initiation date, taken from the LPC database. The numbers reported
are the sums of the intercepts of cross-sectional regressions over the relevant time periods
expressed in percentage terms. Number of observations for each column are given in
parentheses. ***, ** and * denote significance levels of 1, 5 and 10% respectively using two-
tailed tests.

“Winner” Stocks “Loser” Stocks

(3 factor model) (4 factor model) (3 factor model) 4 factor model)
High Low High Low High Low High Low
Stake Stake Stake Stake Stake Stake Stake Stake
Months (371) (371) (371) (371) (102) (103) (102) (103)
(+1,+1) 1.65%** 0.11% 1.57%** -0.08% -1.00% -3.88%*** -0.16% -3.52%**
(+1,+2) 3.44%*** 1.08% 3.67%*** 1.31% 2.47% -2.15% 3.94%* -1.81%
(+1,+3) 3.55%*** 1.14% 3.88%*** 1.64% 2.59% -1.31% 4.13% -0.22%
(+1,+4) 4.52%*** 1.15% 4.74%*** 1.82% 2.17% -0.80% 4.23% -0.21%
(+1,+5) 4.25%*** 1.62% 4.54%*** 2.24% 1.06% -1.95% 3.32% -1.15%
(+1,+6) 4.47%** 2.27% 4.87%*** 3.05%* -0.06% -2.96% 3.00% -1.87%
(+1,+7) 5.20%*** 2.65% 5.81%*** 3.61%** 0.14% -3.54% 3.44% -1.56%
(+1,+8) 4.88%** 2.15% 6.00%*** 3.62%* 0.41% -4.93% 4.14% -3.04%
(+1,+9) 3.53% 2.42% 5.71%** 4.82%** -0.12% -7.03% 3.62% -5.70%
(+1,+10) 4.86%** 1.95% 7.20%*** 4.35%** 1.58% -7.04% 6.41% -5.42%
(+1,+11) 4.31%* 2.26% 6.73%*** 4.67%** 3.10% -8.29% 7.72% -6.13%
(+1,+12) 4.12% 2.17% 6.72%** 5.01%** 3.21% -10.27%* 8.11% -7.90%

69
 Table 12: Differences in the Cost of Borrowing Across Financial
Firms

This table documents results of univariate tests for differences in the cost of borrowing for
financial firms affiliated to bank funds, when they borrow from the lending divisions of their own
families, and all other deals involving borrowers which are financial firms unrelated to bank fund
families. We define as Bank Funds all those mutual funds which belong to a fund family that also
owns a bank. All Within Family Deals Involving Bank Fund Conglomerates are labelled as
Sample A (Panel A). This sample consists of all deals in which the borrower and at least one
lender (in case of a syndicate) belong to the same family which owns both mutual funds as well as
banks. When the deal is between the Bank Fund Conglomerate Asset Management Divisions and
their Respective Lending Divisions, we label the sample as Sample B (Panels B, C and D).
Sample B is, therefore, a subset of Sample A and contains only those deals in which the asset
management arm of the family is borrowing from the lending division of the same family and the
family owns both mutual funds as well as banks. All Other Deals are those deals in which the
borrower is a financial firm which is unrelated to bank fund families (Panels A and B). Financial
deals have been identified as those deals where the 4 digit Primary SIC code of the borrower, as
reported by Loan Pricing Corporation (LPC) data, lies within the range 6000-6999. We also
construct subsets of All Other Deals to take into account only those borrowers which are Trading
Companies (Panel C) and borrowers which are either Trading Companies or Real Estate
Financial Firms (Panel D). Trading companies and Real Estate firms have been identified
according to the 4-digit SIC code classifications of Fama and French (1997) (see their paper for
the 4-digit SIC codes which fall in these categories). The cost of borrowing is measured by the
Yield Spread which is represented as the variable All In Spread Drawn in LPC data. This
variable represents the coupon spread over LIBOR plus the annual fee plus the up-front fee
(which is divided by the maturity of the loan). The table reports t-tests for significance of the
difference in means as well as the Median and Wilcoxon 2 Sample Tests for significance of the
difference in medians of the Yield Spread. ***, ** and * denote significance levels of 1%, 5% and
10% respectively.

70
 Table 12, Panel A: Yield Spread Differences between Within Family Deals Involving
Bank Fund Conglomerates (Sample A) & All Other Financial Deals.

All Other Median Wilcoxon

Sample A Deals T-Test 2 Sample Test 2 Sample Test
Mean Yield Spread 61.10 159.97 14.15***
Median Yield Spread 50.00 150.00 6.54*** 7.69***
Observations 127 7,093

Table 12, Panel B: Yield Spread Differences between Deals of Bank Fund
Conglomerate Asset Management Divisions with Respective Lending Divisions
(Sample B) & All Other Financial Deals.

All Other Median Wilcoxon

Sample B Deals T-Test 2 Sample Test 2 Sample Test
Mean Yield Spread 54.26 159.97 22.78***
Median Yield Spread 50.00 150.00 4.21*** 4.44***
Observations 30 7,093

Table 12, Panel C: Yield Spread Differences between Deals of Bank Fund
Conglomerate Asset Management Divisions with Respective Lending Divisions
(Sample B) & All Other Financial Deals with Trading Firm Borrowers.

All Other Deals Median Wilcoxon

Sample B for Trading Firms T-Test 2 Sample Test 2 Sample Test
Mean Yield Spread 54.26 157.54 21.42***
Median Yield Spread 50.00 150.00 4.15*** 4.97***
Observations 30 3,284

Table 12, Panel D: Yield Spread Differences between Deals of Bank Fund
Conglomerate Asset Management Divisions with Respective Lending Divisions
(Sample B) & All Other Financial Deals with Trading Firm or Real Estate
Borrowers.

All Other Deals

for Trading or Median Wilcoxon
Sample B Real Estate Firms T-Test 2 Sample Test 2 Sample Test
Mean Yield Spread 54.26 170.67 24.59***
Median Yield Spread 50.00 162.50 4.14*** 5.38***
Observations 30 4,215

71