Capital Structure and Performance in the US Banking Industry
21 Pages Posted: 30 May 2010
Date Written: May 29, 2010
Agency theory predicts that leverage affects agency costs and thereby the firm’s influence will be influenced. The goal of the paper is to examine the profitability-capital relationship for the US banks using an unbalanced panel over the period 1995-2007. In our model we used a combination of bank-based and industry-specific variables. Besides using the GMM methodology to control for the endogeneity and the unobservable heterogeneity problems, we document a significant negative link between the capital ratio and the profitability for the banking industry. Moreover, we observed as well a non-monotonic relationship between these variables supported by the efficiency-risk and franchise-value hypotheses. For our sample we recorded that there are not economies of scale if we consider the size of the bank. The results are robust in a number of methods of estimation.
Keywords: Banking Industry, Capital Ratio, Bank Profitability, Panel Data, GMM Model
JEL Classification: G21, G28, G32, G34
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