Publicly Traded versus Privately Held Commercial Banks: Capital Access, Growth and Financial Performance

Abstract

We empirically examine a seldom-tested nexus of relationships that is fundamental to corporate finance theory: that having access to public capital markets may allow firms to grow faster, but may not be value-enhancing due to investment distortions arising from owner-manager conflicts. We use a large matched sample of publicly traded and privately held U.S. commercial banking companies between 1984 and 2012. We gain identification by exploiting (a) the natural exogeneity of banks’ growth opportunities and (b) the life-cycle characteristics of private versus and public firms. We find that public banks are more responsive than private banks to new growth opportunities, but this advantage manifests itself only during local economic downturns when internal capital generation slows. Faster growth is accompanied by relatively higher accounting returns at public banks, an indication that the value increment from faster growth more than offsets any related principal-agent inefficiencies.