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The Role of Local Depositors in Controlling Expenses in Small-Scale Financial Intermediation: An Empirical Analysis

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  • AIDAN HOLLIS
  • ARTHUR SWEETMAN

Abstract

Using data on Irish loan funds, a nineteenth-century quasi-bank system, we explore how the capital structure affects managerial agency to impact non-interest expenses. These organizations had no equity-holders and were financed by deposits and 'capital', comprising donations and accumulated profits, creating problems of managerial moral hazard. Higher net income (before non-interest expenses) is associated with higher salaries and other non-interest expenses. More surprisingly, higher 'capital'-deposit ratios led to higher expenses even after controlling for net income. While this institution is unique, the findings suggest that depositors could assist in controlling expenses in microfinance organizations. Copyright (c) The London School of Economics and Political Science 2007.

Suggested Citation

  • Aidan Hollis & Arthur Sweetman, 2007. "The Role of Local Depositors in Controlling Expenses in Small-Scale Financial Intermediation: An Empirical Analysis," Economica, London School of Economics and Political Science, vol. 74(296), pages 713-735, November.
  • Handle: RePEc:bla:econom:v:74:y:2007:i:296:p:713-735
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    References listed on IDEAS

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    1. McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, pages 139-168.
    2. McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, pages 139-168.
    3. Barro, Robert J, 1984. "Rational Expectations and Macroeconomics in 1984," American Economic Review, American Economic Association, pages 179-182.
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    Cited by:

    1. Mersland, Roy, 2009. "The Cost of Ownership in Microfinance Organizations," World Development, Elsevier, pages 469-478.
    2. Batiz-Lazo, Bernardo & Noguchi, Masayoshi, 2011. "Auditors and the supervision of retail finance: evidence from two small-sized building societies, 1976-1978," MPRA Paper 32193, University Library of Munich, Germany.

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