Capital structure and cost efficiency in the Taiwanese banking industry

Tsai-Lien Yeh

The Service Industries Journal, 2008, vol. 31, issue 2, 237-249

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.

Date: 2008
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DOI: 10.1080/02642060802710230

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The Service Industries Journal is currently edited by Eileen Bridges, Professor Domingo Ribeiro, Ronald Goldsmith, Barry Howcroft and Youjae Yi

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