Managerial Protections, Capital Requirements, and Bank Lending

50 Pages Posted: 1 Jan 2020 Last revised: 14 Jul 2020

See all articles by Joshua Bosshardt

Joshua Bosshardt

Massachusetts Institute of Technology (MIT)

Ali Kakhbod

Massachusetts Institute of Technology (MIT) - Department of Economics

Date Written: July 1, 2020

Abstract

We introduce a model to illustrate how the effect of capital requirements on bank lending can qualitatively depend on the extent of managerial protections against shareholder actions. Protections encourage managers to pursue unprofitable projects. Protected managers can still be disciplined by debt. If debt is constrained by capital requirements, then a higher level of investment can serve as a partial substitute. Capital requirements can therefore spur increased investment for firms with managerial protections. Empirically, bank stress-testing after the 2008 financial crisis led to an increase in lending for banks with strong protections compared to banks with weak protections.

Keywords: Managerial protections, Stress testing, Capital structure, Ownership structure, Investment, Banking

JEL Classification: D24, G32

Suggested Citation

Bosshardt, Joshua and Kakhbod, Ali, Managerial Protections, Capital Requirements, and Bank Lending (July 1, 2020). Available at SSRN: https://ssrn.com/abstract=3499164 or http://dx.doi.org/10.2139/ssrn.3499164

Joshua Bosshardt

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Ali Kakhbod (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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