Bank Capital Structure: Charter Value and Diversification Effects

Stern Working Paper Series S-96-52

Posted: 29 Jul 1997

See all articles by Anthony Saunders

Anthony Saunders

New York University - Leonard N. Stern School of Business

Berry K. Wilson

Pace University - Department of Finance and Economics

Date Written: December 1996

Abstract

Recent profitability and recapitalization trends in the banking industry appear to be consistent with a hypothesis advanced by Keeley (1990), Marcus (1984), Demsetz and Strahan (1996), and Demsetz, Saidenberg and Strahan (1996) termed the "charter value" hypothesis. Under this hypothesis banks with greater charter value voluntarily hold higher capital ratios to self-insure against charter loss under regulatory-enforced closure. Alternatively, increased branching and other forms of diversification may actually serve to reduce the capital required by banks to protect against adverse economic shocks, while increasing their expected survival rates. We term this alternative scenario the "diversification hypothesis". This paper tests these hypotheses using a sample of bank-specific market and accounting data covering the period 1893-1992. Our results indicate weak support for the charter value hypothesis during the post-WW II period. By contrast, pre-WW II the results of our analysis offer some support for the diversification hypothesis.

JEL Classification: G21

Suggested Citation

Saunders, Anthony and Wilson, Berry K., Bank Capital Structure: Charter Value and Diversification Effects (December 1996). Stern Working Paper Series S-96-52. Available at SSRN: https://ssrn.com/abstract=8444

Anthony Saunders (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Berry K. Wilson

Pace University - Department of Finance and Economics ( email )

Lubin School of Business
New York, NY 10038
United States

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