If controlling shareholders can divert profits, equity ownership is more concentrated the higher the stock returns correlation. A higher returns correlation reduces the benefits of diversification, giving rise to both a higher investment by the controlling shareholder in the asset that he controls and a lower investment by the non-controlling shareholders. The empirical analysis supports the predictions of the model: equity ownership is more concentrated in countries where the stock returns correlation is higher; moreover the intensity of the relationship between the stock returns correlation and ownership concentration is amplified by poor investor protection.

The paper studies the effectiveness of bank resolutions using a comprehensive database on banks headquartered in 18 European countries over the period 2000–19. By means of difference-in-differences methodology, we find that impaired asset segregations – otherwise known as bad banks – have been more effective than state-funded recapitalisations of distressed banks. While recapitalised banks seem to have used the injected funds mainly to clean up their balance sheets by reducing problem loans and cutting down on lending, banks that segregated assets increased progressively their lending after the creation of the bad bank. For both types of banking crisis interventions, we find a significant ex-post reduction in the cost of bank funding and shift towards deposit funding.