Bank Capital Structure: An Analysis of the Charter Value Hypothesis
Posted: 24 Feb 1995
Recent profitability and recapitalization trends in the banking industry appear to be consistent with a hypothesis advanced by Keeley (1990) termed the "charter value" hypothesis. Under this hypothesis banks with greater charter value voluntarily hold higher capital ratios to self-insure against its loss under regulatory enforced closure. This paper utilizes a one hundred year history of individual bank market and accounting data to test the hypothesis. Our results indicate that, while there is empirical support for the hypothesis in some sub-periods, we do not find that the charter value hypothesis holds over the full one hundred years of the study.
JEL Classification: G21
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