This paper empirically investigates whether a bank's decision to adjust its capital is influenced by the existence of a divergence between the voting and the cash-flow rights of its ultimate owner. We use a novel hand-collected dataset on detailed control and ownership characteristics of 405 European commercial banks to estimate an ownership-augmented capital adjustment model over the 2003-2010 period. We find no differences in adjustment speeds when banks need to adjust their Tier 1 capital downwards to reach their target capital ratio. However, when the adjustment process requires an upward shift in Tier 1 capital, the adjustment is significantly slower for banks controlled by a shareholder with a divergence between voting and cash-flow rights. Further investigation shows that such an asymmetry only holds if the ultimate owner is a family or a state or if the bank is headquartered in a country with relatively weak shareholder protection. Moreover, this behavior is tempered during the 2008 financial crisis, possibly because of government capital injections or support from ultimate owners (propping up). Our findings provide new insights for understanding capital adjustment in general and have policy implications on the road to the final stage of Basel III in 2019.
