Universal Banking and Corporate Control

Many researchers claim that the German universal banks’ great influence in corporate control is harmful, since these banks are often both debt holders and equity owners of the firm. However, in this paper I argue differently. Analyzing the banks’ role as investors, I find that, due to contractual incompleteness, investor control and the ownership of both equity and debt complement one another. Only if the investor’s control is combined with mixed finance can the maximization of the firm’s value be ensured. Moreover, if the initial investment is large enough, investor control is the only system that results in efficient decision making.