Corporate Control, Portfolio Choice, and the Decline of Banking

Gary Gorton and Richard Rosen

No 4247, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In the last two decades U.S. banks have become systematically less profitable and riskier as nonbank competition has eroded the profitability of banks' traditional activities. Bank failures, insignificant from 1934, the date the Glass-Steagall Act was passed, until 1980, rose exponentially in the 1980s. The leading explanation for the persistence of these trends centers on fixed-rate deposit insurance: the insurance gives bank shareholders an incentive to take on risk when the value of bank charters falls. We propose and test an alternative explanation based on corporate control considerations. We show that managerial entrenchment, more than moral hazard associated with deposit insurance, explains the recent behavior of the banking industry.

Date: 1992-12
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published as Journal of Finance, Vol. 50, no. 5 (1995): 1377-1420.

Downloads: (external link)
http://www.nber.org/papers/w4247.pdf (application/pdf)

Related works:
Journal Article: Corporate Control, Portfolio Choice, and the Decline of Banking (1995)
Working Paper: Corporate control, portfolio choice, and the decline of banking (1992)
Working Paper: Corporate Control, Portfolio Choice, and the Decline of Banking
Working Paper: Corporate Control, Portfolio Choice, and the Decline of Banking
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:4247

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w4247

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().