Capital Structure and Firm Performance: A New Approach to Testing Agency Theory and an Application to the Banking Industry
Allen N. Berger
University of South Carolina - Moore School of Business; Wharton Financial Institutions Center; Tilburg University - CentER
Emilia Bonaccorsi di Patti
Bank of Italy
FEDS Working Paper No. 2002-54
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
Number of Pages in PDF File: 39
Keywords: Capital structure, agency costs, banking, efficiency
JEL Classification: G32, G34, G21, G28working papers series
Date posted: June 26, 2003
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 0.563 seconds