Capital Structure and Firm Performance: A New Approach to Testing Agency Theory and an Application to the Banking Industry

39 Pages Posted: 26 Jun 2003

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Emilia Bonaccorsi di Patti

Bank of Italy

Date Written: January 2003

Abstract

Corporate governance theory predicts that leverage affects agency costs and thereby influences firm performance. We propose a new approach to test this theory using profit efficiency, or how close a firm's profits are to the benchmark of a best-practice firm facing the same exogenous conditions. We are also the first to employ a simultaneous-equations model that accounts for reverse causality from performance to capital structure. We also control for measures of ownership structure in the tests. We find that data on the U.S. banking industry are consistent with the theory, and the results are statistically significant, economically significant, and robust.

Keywords: Capital structure, agency costs, banking, efficiency

JEL Classification: G32, G34, G21, G28

Suggested Citation

Berger, Allen N. and Bonaccorsi di Patti, Emilia, Capital Structure and Firm Performance: A New Approach to Testing Agency Theory and an Application to the Banking Industry (January 2003). FEDS Working Paper No. 2002-54. Available at SSRN: https://ssrn.com/abstract=361280 or http://dx.doi.org/10.2139/ssrn.361280

Allen N. Berger (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Emilia Bonaccorsi di Patti

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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