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Universal Banking, Asymmetric Information and the Stock Market

Author

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  • Parantap Basu

    (Durham Business School)

  • Sanjay Banerji

    (University of Nottingham)

Abstract

The paper shows that attempts to sell stocks of borrowing firms by the universal banks upon private information result in: (i) discounting of stock prices, (ii) a higher fraction of ownership in the borrowing firm and a greater loan size, (iii) an increase in consumption risk and precautionary savings of households. Hence, the size of the commercial banking activity increases under asymmetric information at the expense of a higher consumption risk borne by the households. The magnitude of the resulting stock market discount depends crucially on the market ís perception about the relative proportion of lemons in the stock market.

Suggested Citation

  • Parantap Basu & Sanjay Banerji, 2013. "Universal Banking, Asymmetric Information and the Stock Market," CEGAP Working Papers 2013_07, Durham University Business School.
    • Handle: RePEc:dur:cegapw:2013_07
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    File URL: https://www.dur.ac.uk/resources/business/working-papers/Universal_revision_July_2013.pdf
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    References listed on IDEAS

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    Cited by:

    1. Banerji, Sanjay & Basu, Parantap, 2015. "Borrower's moral hazard, risk premium, and welfare: A comparison of universal and stand-alone banking systems," The Journal of Economic Asymmetries, Elsevier, vol. 12(1), pages 61-72.

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