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Do Bankers Sacrifice Value to Build Empires? Managerial Incentives, Industry Consolidation and Financial Performance

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Listed author(s):
  • Joseph P. Hughes
  • William W. Lang
  • Loretta J. Mester
  • Choon-Geol Moon
  • Michael S. Pagano

Abstract

Bank consolidation is a global phenomenon that may enhance stakeholders' value if managers do not sacrifice value to build empires. We find strong evidence of managerial entrenchment at U.S. bank holding companies that have higher levels of managerial ownership, better growth opportunities, poorer financial performance, and smaller asset size. At banks without entrenched management, both asset acquisitions and sales are associated with improved performance. At banks with entrenched management, sales are related to smaller improvements while acquisitions are associated with worse performance. Consistent with scale economies, an increase in assets by internal growth is associated with better performance at most banks. Key Words: consolidation, acquisitions, managerial incentives, efficiency, agency problems, corporate control, stochastic frontier

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Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 02-18.

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Date of creation: Feb 2002
Handle: RePEc:wop:pennin:02-18
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Find related papers by 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
  • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
  • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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