Keywords: Capital structure, agency costs, banking, efficiency
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.
Full paper (289 KB PDF)
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Last update: November 18, 2002