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Capital structure and firm performance: a new approach to testing agency theory and an application to the banking industry

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Author Info
Allen N. Berger
Emilia Bonaccorsi di Patti

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Abstract

Corporate governance theory predicts that leverage affects agency costs and thereby influences firm performance. We propose a new approach to test this theory using profit efficiency, or how close a firm's profits are to the benchmark of a best-practice firm facing the same exogenous conditions. We are also the first to employ a simultaneous-equations model that accounts for reverse causality from performance to capital structure. We also control for measures of ownership structure in the tests. We find that data on the U.S. banking industry are consistent with the theory, and the results are statistically significant, economically significant, and robust.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2002-54.

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Date of creation: 2002
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Handle: RePEc:fip:fedgfe:2002-54

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Keywords: Bank capital ; Capitalization ; Banks and banking;

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  11. Allen N. Berger & Robert DeYoung, 1997. "Problem loans and cost efficiency in commercial banks," Finance and Economics Discussion Series 1997-8, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  25. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March. [Downloadable!] (restricted)
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  31. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July. [Downloadable!] (restricted)
  32. McConnell, John J. & Servaes, Henri, 1995. "Equity ownership and the two faces of debt," Journal of Financial Economics, Elsevier, vol. 39(1), pages 131-157, September. [Downloadable!] (restricted)
  33. McAllister, Patrick H. & McManus, Douglas, 1993. "Resolving the scale efficiency puzzle in banking," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 389-405, April. [Downloadable!] (restricted)
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  35. James S. Ang & Rebel A. Cole & James Wuh Lin, 2000. "Agency Costs and Ownership Structure," Journal of Finance, American Finance Association, vol. 55(1), pages 81-106, 02. [Downloadable!] (restricted)
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  38. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-88, June. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Pratomo, Wahyu Ario & Ismail, Abdul Ghafar, 2006. "Islamic Bank Performance And Capital Structure," MPRA Paper 6012, University Library of Munich, Germany. [Downloadable!]
  2. Lotta Väänänen, 2003. "Agency Costs and R&D: Evidence from Finnish SMEs," Discussion Papers 859, The Research Institute of the Finnish Economy. [Downloadable!]
  3. Lieven Baert & Rudi Vander Vennet, 2009. "Bank Ownership, Firm Value and Firm Capital Structure in Europe," Working Paper / FINESS 2.2, DIW Berlin, German Institute for Economic Research. [Downloadable!]
  4. Soedarmono, Wahyoe & Augier, Laurent, 2009. "Threshold Effect and Financial Intermediation in Economic Development," MPRA Paper 14905, University Library of Munich, Germany. [Downloadable!]
  5. Douglas D. Evanoff & Evren Ors, 2002. "Local market consolidation and bank productive efficiency," Working Paper Series WP-02-25, Federal Reserve Bank of Chicago. [Downloadable!]
  6. O. De Jonghe & R. Vander Vennet, 2007. "Competition versus Efficiency: What drives franchise values in European banking?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/491, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]
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