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Implications of Corporate Capital Structure Theory for Banking Institutions

  • Yair E. Orgler
  • Robert A. Taggart, Jr.
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    This paper applies some recent advances in corporate capital structure theory to the determination of optimal capital in banking. The effects of corporate and personal taxes, government regulation, the technology of producing deposit services and the costs of bankruptcy and agency problems are all discussed in the context of the U.S. commercial banking system. The analysis suggests explanations for why commercial banks tend to have relatively less capital than nonfinancial firms, why commercial bank leverage has tended to increase over time and why large banks tend to have relatively less capital than small banks.

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    File URL: http://www.nber.org/papers/w0737.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0737.

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    Date of creation: Aug 1981
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    Publication status: published as Orgler, Yair E. and Robert A. Taggart, Jr. "Implications of Corporate Capital Structure Theory for Banking Institutions." Journal of Money, Credit and Banking, Vol. 15, No. 2 (May 1983), pp.212-221.
    Handle: RePEc:nbr:nberwo:0737
    Note: ME
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    Web page: http://www.nber.orgEmail:


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    1. Barnea, Amir & Haugen, Robert A & Senbet, Lemma W, 1981. "An Equilibrium Analysis of Debt Financing under Costly Tax Arbitrage and Agency Problems," Journal of Finance, American Finance Association, vol. 36(3), pages 569-81, June.
    2. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June.
    3. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    4. Buser, Stephen A & Chen, Andrew H & Kane, Edward J, 1981. "Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital," Journal of Finance, American Finance Association, vol. 36(1), pages 51-60, March.
    5. Peltzman, Sam, 1970. "Capital Investment in Commercial Banking and Its Relationship to Portfolio Regulation," Journal of Political Economy, University of Chicago Press, vol. 78(1), pages 1-26, Jan.-Feb..
    6. Pringle, John J, 1974. "The Capital Decision in Commercial Banks," Journal of Finance, American Finance Association, vol. 29(3), pages 779-95, June.
    7. Santomero, Anthony M & Watson, Ronald D, 1977. "Determining an Optimal Capital Standard for the Banking Industry," Journal of Finance, American Finance Association, vol. 32(4), pages 1267-82, September.
    8. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
    9. Taggart, Robert A, Jr & Greenbaum, Stuart I, 1978. "Bank Capital and Public Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(2), pages 158-69, May.
    10. Miller, Merton H. & Scholes, Myron S., 1978. "Dividends and taxes," Journal of Financial Economics, Elsevier, vol. 6(4), pages 333-364, December.
    11. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
    12. Kraus, Alan & Litzenberger, Robert H, 1973. "A State-Preference Model of Optimal Financial Leverage," Journal of Finance, American Finance Association, vol. 28(4), pages 911-22, September.
    13. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
    14. Thomas F. Cargill & Thomas Mayer, 1992. "U.S. Deposit Insurance Reform," Contemporary Economic Policy, Western Economic Association International, vol. 10(3), pages 95-103, 07.
    15. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-47, May.
    16. Robichek, Alexander A. & Myers, Stewart C., 1966. "Problems in the Theory of Optimal Capital Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 1(02), pages 1-35, June.
    17. Mingo, John J, 1975. "Regulatory Influence on Bank Capital Investment," Journal of Finance, American Finance Association, vol. 30(4), pages 1111-21, September.
    18. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
    19. Haugen, Robert A & Senbet, Lemma W, 1978. "The Insignificance of Bankruptcy Costs to the Theory of Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 33(2), pages 383-93, May.
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