Competition and Agency Problems within Banks: Evidence from Insider Lending
60 Pages Posted: 30 Apr 2020 Last revised: 3 Feb 2021
Date Written: December 14, 2020
This paper studies whether greater competition can mitigate agency problems within banks. We measure the intensity of the agency conflict within a bank by the volume of loans that the bank lends to its insiders (e.g., executives). We first check that these loans are a form of private benefit. By exploiting interstate branching deregulation, we then show that banks react to greater competition by reducing insider lending, especially when the entry of new competitors may more strongly affect bank profitability. Results are robust to using various identification approaches and alternative indicators of agency conflict. We conclude that competitive pressure reduces managerial self-dealing.
Keywords: Banks, Agency Problems, Private Benefits, Competition, Insider Loans
JEL Classification: G21, G28, G38
Suggested Citation: Suggested Citation