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Capital structure and cost efficiency in the Taiwanese banking industry

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  • Tsai-Lien Yeh

Abstract

By utilizing a sample of 44 Taiwanese banks, this study analyses whether banks can mitigate agency costs, to increase firm performance through optimization of capital structure. The stochastic frontier approach is adopted to determine cost efficiency as the firm performance indicator, an approach that is capable of controlling outside environmental factors. Furthermore, this study uses two-stage least squares to estimate two simultaneous equations that are then used to examine the relationship between capital structure and firm performance. This study includes indicators of ownership structure. The main results are: first, optimal capital structure is selected by the manager to combat the agency problem and thus improve performance, yielding results consistent with agency theory; and second, reducing managerial share ownership will decrease agency cost and increase firm performance, a finding that is consistent with the Entrenchment Hypothesis.

Suggested Citation

  • Tsai-Lien Yeh, 2008. "Capital structure and cost efficiency in the Taiwanese banking industry," The Service Industries Journal, Taylor & Francis Journals, vol. 31(2), pages 237-249, December.
    • Handle: RePEc:taf:servic:v:31:y:2008:i:2:p:237-249
    DOI: 10.1080/02642060802710230
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    1. Berger, Allen N. & Bonaccorsi di Patti, Emilia, 2006. "Capital structure and firm performance: A new approach to testing agency theory and an application to the banking industry," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1065-1102, April.
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