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

Author

Listed:
  • Joseph P. Hughes

    () (Rutgers University)

  • William W. Lang

    () (Federal Reserve Bank of Philadelphia)

  • Choon-Geol Moon

    () (Hanyang University)

  • Michael S. Pagano

    () (Villanova University)

Abstract

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.

Suggested Citation

  • Joseph P. Hughes & William W. Lang & Choon-Geol Moon & Michael S. Pagano, 2004. "Managerial Incentives and the Efficiency of Capital Structure in U.S. Commercial Banking," Departmental Working Papers 200401, Rutgers University, Department of Economics.
  • Handle: RePEc:rut:rutres:200401
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    References listed on IDEAS

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    Cited by:

    1. Fiordelisi, Franco, 2007. "Shareholder value efficiency in European banking," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 2151-2171, July.

    More about this item

    Keywords

    capital allocation; efficiency; agency problems; corporate control; charter value;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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