The Federal Reserve Board eagle logo links to home page
Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page Capital Structure and Firm Performance: A New Approach to Testing Agency Theory and an Application to the Banking Industry
Allen N. Berger and Emilia Bonaccorsi di Patti

Abstract: Corporate governance theory predicts that leverage affects agency costs and thereby influences firm performance. We propose a new approach to test this theory using profit efficiency, or how close a firm's profits are to the benchmark of a best-practice firm facing the same exogenous conditions. We are also the first to employ a simultaneous-equations model that accounts for reverse causality from performance to capital structure. We also control for measures of ownership structure in the tests. We find that data on the U.S. banking industry are consistent with the theory, and the results are statistically significant, economically significant, and robust.

Keywords: Capital structure, agency costs, banking, efficiency

Full paper (289 KB PDF)

Home | FEDS | List of 2002 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: November 18, 2002