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Corporate Control, Portfolio Choice, and the Decline of Banking

Corporate Control, Portfolio Choice, and the Decline of Banking ABSTRACT In the 1980s, U.S. banks became systematically less profitable and riskier as non‐bank competition eroded the profitability of banks' traditional activities. Bank failures rose exponentially during this decade. The leading explanation for the persistence of these trends centers on fixed‐rate deposit insurance: the insurance gives bank equityholders an incentive to take on risk when the value of bank charters falls. We propose and test an alternative explanation based on corporate control considerations. We show that managerial entrenchment played a more important role than did the moral hazard associated with deposit insurance in explaining the recent behavior of the banking industry. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Corporate Control, Portfolio Choice, and the Decline of Banking

The Journal of Finance , Volume 50 (5) – Dec 1, 1995

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References (42)

Publisher
Wiley
Copyright
1995 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1995.tb05183.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT In the 1980s, U.S. banks became systematically less profitable and riskier as non‐bank competition eroded the profitability of banks' traditional activities. Bank failures rose exponentially during this decade. The leading explanation for the persistence of these trends centers on fixed‐rate deposit insurance: the insurance gives bank equityholders an incentive to take on risk when the value of bank charters falls. We propose and test an alternative explanation based on corporate control considerations. We show that managerial entrenchment played a more important role than did the moral hazard associated with deposit insurance in explaining the recent behavior of the banking industry.

Journal

The Journal of FinanceWiley

Published: Dec 1, 1995

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