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Subchapter S, An Entrepreneurial Survival Strategy for Small Banks

  • Steven G. Craig

    (University of Houston)

  • Polly T. Hardee

    (University of Houston)

With the passage of the Small Business Job Protection Act of 1996, many small banks throughout the United States became eligible to reorganize as a Subchapter S corporation. This allows these banks to eliminate double taxation, and increase shareholder value. Consequently, employing this entrepreneurial survival tool extends “new life†to the small bank. Accompanying this strategy are differences in corporate governance, primarily more concentration of ownership. Thus, this paper examines the behavior of Subchapter S banks as compared to banks of similar size in order to determine significant performance differences. It also focuses on bank structure and small business lending activity, an area of high asset concentration in small banks. Overall, we find shareholder value appears to increase in a Subchapter S banking organization through higher earnings, larger dividend payout ratios, and similar risk measures. We find little differences in these banks in relation to small business lending. The implications are that a small bank’s survival rate will be higher in the consolidation process by employing the Subchapter S strategy.

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File URL: http://jefsite.org/RePEc/pep/journl/jef-2002-07-3-e-craig.pdf
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Article provided by Pepperdine University, Graziadio School of Business and Management in its journal Journal of Entrepreneurial Finance and Business Ventures.

Volume (Year): 7 (2002)
Issue (Month): 3 (Fall)
Pages: 53-60

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Handle: RePEc:pep:journl:v:7:y:2002:i:3:p:53-60
Contact details of provider: Postal: 24255 Pacific Coast Hwy, Malibu CA
Web page: http://bschool.pepperdine.edu/jef

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  1. Strahan, Philip E. & Weston, James P., 1998. "Small business lending and the changing structure of the banking industry1," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 821-845, August.
  2. Loretta J. Mester, 1997. "What's the point of credit scoring?," Business Review, Federal Reserve Bank of Philadelphia, issue Sep, pages 3-16.
  3. Lawrence G. Goldberg & Lawrence J. White, 1997. "De Novo Banks and Lending to Small Businesses: An Empirical Analysis," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-039, New York University, Leonard N. Stern School of Business-.
  4. Jayaratne, Jith & Wolken, John, 1999. "How important are small banks to small business lending?: New evidence from a survey of small firms," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 427-458, February.
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