In this thesis, we use a wide cross-sectional sample of both privately held and publicly listed European banks over the period 1999 to 2008 to analyse the role played by bank shareholder incentives in the performance of banks and, ultimately, on the capital allocation efficiency of the economy as a whole. In our first essay, we use the entire range of Bankscope and Amadeus Top 250,000 to construct the portfolios of shareholders who hold equity stakes in banks for each year. We show that about 62 per cent of the ultimate largest shareholders of banks are diversified investors, holding on average equity investments from thirteen companies in their portfolio. We exploit this heterogeneity to investigate the impact of their portfolio diversification on bank risk-taking. Our results show that the relationship between portfolio diversification and bank risk-taking is both statistically significant and economically sizeable. Overall, these findings contribute to the literature by providing novel evidence on the characteristics of bank shareholders' portfolios and by studying an explicit channel through which shareholders' incentives for risk-taking affect the banks' risk.In our second essay, we build on our previous evidence to further investigate whether the level of diversification of bank shareholders has any effect on the efficiency of capital allocation in the economy. We aggregate our data at regional level, using information on the address where companies and banks have their headquarters and identify regions based on Eurostat Nomenclature of Territorial Units for Statistics (NUTS) definitions. Our results indicate that capital appears to be allocated more efficiently in regions where banks are controlled by (more) diversified shareholders. In particular, a change in value-added growth increases capital investment by approximately 8 per cent of its mean in regions where banks are controlled by undiversified shareholders, while it increases capital investment by almost 21 per cent in regions where banks are controlled by shareholders with diversified portfolios. These findings contribute to the literature by studying a specific novel channel through which financial development, in the form of bank shareholders' diversification, affects the real economy.Lastly, in our third essay we combine our detailed micro-level data on ownership with commercial loans market data from Dealscan to evaluate evidence of related lending in Western European banks. In doing so, we are able to explicitly identify related loans and provide original evidence of related lending and preferential lending terms. We show that 14 per cent of banks in our sample engage in related lending, and that firms borrowing from their related banks have lower costs and higher access to credit. Given these findings, we then proceed to analyse the effect of related lending in bank performance. Our tests show that banks participating in related lending experience an increase in average returns of 11 per cent. Results are both statistically significant and economically sizeable. Overall, our findings contribute to the literature by providing evidence in support the information asymmetry view of related lending, suggesting that in countries with strong rule of law related lending may become a relevant mechanism for informational capital accumulation for banks, allowing them to make more profitable lending decisions.