Savings Banks or Super Banks? An Empirical Study on the Impact of Equity Certificates’ Unique Features on Pricing

Abstract

Equity Certificates (“ECs”) have been pivotal in providing Norwegian savings banks with access to capital and maintaining their competitive market position. ECs are distinctively characterized by their complex equity structure, downside protection, and limited voting rights. Despite ECs’ significance, their pricing dynamics have been subject to meager academic research, partly due to being confined to the small Norwegian market. This motivated us to conduct a preliminary empirical study on the impact of ECs’ unique features on pricing. Specifically, we hypothesize that (1) the market values the downside protection in ECs, and (2) their unique features contribute to pricing discrepancies compared to shares. We investigate our hypotheses through panel data regressions utilizing the Price-to-Book (“P/B”) ratio as a dependent variable. For all models, we utilize a self-constructed novel dataset of all listed Norwegian savings banks with 1764 unique bank-quarter observations, from 2005-Q1 to 2023-Q4. This research is an initial step toward building a solid foundation rooted in empirical analysis on the subject of EC pricing dynamics. We find a positive relationship between the downside protection of ECs and the P/B ratio. However, we find inconclusive evidence that this positive effect is greater during periods of financial instability, contrary to what financial theory would suggest. Our models’ inability to yield conclusive results during crises may be attributed to ambiguous interpretations of the downside protection proxies in such periods. Surprisingly, being an EC bank, as opposed to a share bank, seems to negatively influence pricing. This implies that ECs’ downside protection is overshadowed by features such as instrument complexity and limited voting rights. Finally, our quasi-experiment yields inconclusive results on the effect of converting ECs to shares. Overall, the thesis concludes that the market understands the unique equity structure of ECs, at least to some extent, and prices them accordingly. Beyond the pricing dynamics, our research raises questions about whether the capital structure serves its intended purpose. Thus, the findings of our thesis may offer meaningful insights to key stakeholders.