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

By Allen N. Berger, Emilia Bonaccorsi di Patti. 2002

1,283 citations recorded by the source corpus.

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.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/f1370fba479f120d6ef8c472dd9443b70ccba3a4

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Citations in the corpus

Does the Stock Market Value Bank Diversification (2007, background): “Berger and Ofek, 1995; Villalonga, 2004). Berger and Ofek (1995) also report that, although industry diversification reduces value on average, relatedness mitigates the value loss. Arguably, the activities undertaken in financial conglomerates have a higher degree of similarity than in most other in”
The impact of banking regulations on banks' cost and profit efficiency: Cross-country evidence (2009, background): “Furthermore, as Berger and Humphrey (1997) argue, “a frontier formed from the complete data set across nations would allow for a better comparison across nations, since the banks in each country would be compared against the same standard” (p.”
Determinants of Financial Sustainability of Microfinance Institutions in East Africa (2013, background): “A number of studies provide empirical evidence supporting a positive relationship between debt level and firm’s performance or profitability (Roden and Lewellen,1995; Champion,1999; Berger and Bonaccorsi di patti,2006) negative relationship between debt level and firm’s performance or profitability ”
Capital Structure, Profitability and Firm Value: Panel Evidence of Listed Firms in Kenya (2014, positive): “In an interesting study of the banking sector, Berger and di Patti (2006) demonstrate that high leverage ratio is related to higher profit efficiency.”