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

Joseph Hughes (), William W. Lang (), Choon-Geol Moon () and Michael S. Pagano ()
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William W. Lang: Federal Reserve Bank of Philadelphia
Choon-Geol Moon: Hanyang University
Michael S. Pagano: Villanova University

Departmental Working Papers from Rutgers University, Department of Economics

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.

Keywords: capital allocation; efficiency; agency problems; corporate control; charter value (search for similar items in EconPapers)
JEL-codes: G32 G21 D24 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2004-01-15
New Economics Papers: this item is included in nep-cfn
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