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Managerial Incentives and the Efficiency of Capital Structure in U.S. Commercial Banking

  • Joseph P. Hughes

    ()

    (Rutgers University)

  • William W. Lang

    ()

    (Federal Reserve Bank of Philadelphia)

  • Choon-Geol Moon

    ()

    (Hanyang University)

  • Michael S. Pagano

    ()

    (Villanova University)

We extend the literature on the effects of managerial entrenchment to consider how safety-net subsidies and financial distress costs interact with managerial incentives to influence capital structure in U.S. commercial banking. Using cross-sectional data on publicly traded, highest-level U.S. bank holding companies, we find empirical evidence of Marcus' proposition (1984) that there are dichotomous strategies for value maximization—one involving relatively higher financial leverage and the other, lower financial leverage. We find that a less levered capital structure is associated with higher charter value and vice versa. Moreover, differences in charter value result in dichotomous strategies for managerial entrenchment: under-performing, less levered firms hold too little capital while under-performing, more levered firms hold too much.

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Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 200401.

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Length: 20 pages
Date of creation: 15 Jan 2004
Date of revision:
Handle: RePEc:rut:rutres:200401
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