Do Bankers Sacrifice Value to Build Empires? Managerial Incentives, Industry Consolidation, and Financial Performance

Posted: 2 Sep 2002

See all articles by Joseph P. Hughes

Joseph P. Hughes

Rutgers, The State University of New Jersey - Department of Economics

Michael S. Pagano

Villanova University - Villanova School of Business

William W. Lang

Promontory Financial Group

Loretta J. Mester

Federal Reserve Banks - Federal Reserve Bank of Cleveland; University of Pennsylvania - The Wharton School

Choon-Geol Moon

Hanyang University

Multiple version iconThere are 2 versions of this paper

Abstract

Bank consolidation is a global phenomenon that may enhance stakeholders' value if managers do not sacrifice value to build empires. We find strong evidence of managerial entrenchment at U.S. bank holding companies that have higher levels of managerial ownership, better growth opportunities, poorer financial performance, and smaller asset size. At banks without entrenched management, both asset acquisitions and sales are associated with improved performance. At banks with entrenched management, sales are related to smaller improvements while acquisitions are associated with worse performance. Consistent with scale economies, an increase in assets by internal growth is associated with better performance at most banks.

Keywords: consolidation, acquisitions, managerial incentives, efficiency, agency problems, corporate control, stochastic frontier

JEL Classification: G32, G21, G34, D24

Suggested Citation

Hughes, Joseph P. and Pagano, Michael S. and Lang, William W. and Mester, Loretta J. and Moon, Choon-Geol, Do Bankers Sacrifice Value to Build Empires? Managerial Incentives, Industry Consolidation, and Financial Performance. Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=322540

Joseph P. Hughes

Rutgers, The State University of New Jersey - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

Michael S. Pagano

Villanova University - Villanova School of Business ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
United States
(610) 519-4389 (Phone)

HOME PAGE: http://www90.homepage.villanova.edu/michael.pagano

William W. Lang

Promontory Financial Group ( email )

1201 Pennsylvania Avenue, NW
Suite 617
Washington, DC 20004
United States

HOME PAGE: http://www.promontory.com

Loretta J. Mester (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

University of Pennsylvania - The Wharton School

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Choon-Geol Moon

Hanyang University ( email )

17 Haegdang-dong
Seongdong-ku
Seoul, 133-791
KOREA

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