ERBE 02 1 05
Bank Capital Structure: Revisiting Evidence from the Field
MÁRIO COUTINHO DOS SANTOS a
a CICEE, and Universidade Autónoma de Lisboa, Portugal.
To cite this article:
Coutinho dos Santos, M. 2022. Bank Capital Structure: Revisiting Evidence from the Field. European Review of Business Economics II(1): 101-134.
Published: December 2022
This paper examines investigates bank (voluntary) capital structure decisions, revisiting a unique dataset gathered through face-to-face interviews with a sample of 51 CEOs of banks, representing 91.5 percent of the total net assets of the Portuguese banking industry, over the 1989-1998 period. Survey evidence documents that the allocation of ownership control rights, growth opportunities, reputation in banking markets, financial flexibility, information signaling, and debt tax shields are significant internal determinants of bank capital structure choice. We also found that capital regulatory discipline is the only significant external determinant. Most survey participants elicited trading off ownership control rights dilution and the benefits of debt / equity securities issuance, and the static tradeoff model, as their preferred capital structure policies. The pecking order and the market-timing theories received moderate to weak preference. The paper extends the literature, providing field evidence that capital structure choice does matter for bank value, and it can be explained within the framework of the corporate capital structure theory.
Survey, bank capital structure, target leverage, static trade-off, pecking order, market timing.
Akerlof, G. (2020). Sins of omission and the practice of economics. Journal of Economic Literature, 58(2), 405-418.
Bancel, F., & Mittoo, U. (2004). Cross-country determinants of capital structure choice: a survey of european firms. Financial Management, 33(4), 103-132.
Basel Committee on Banking Supervision. (2019). The costs and benefits of bank capital – a review of the literature. Bank for International Settlements Working Paper No. 37, Basle, Switzerland.
Berger, A., DeYoung, R., Flannery, M., Lee, D., & Öztekin, Ö. (2008). How do large banking organizations manage their capital ratios? Journal of Financial Services Research, 34, 123- 149.
Berlin, M. (2011). Can we explain banks capital structures? Federal Reserve Bank of Philadelphia. Business Review, Q2, 1-11.
Besanko, D., & Kanatas, G. (1996). The regulation of bank capital: do capital standards promote bank safety? Journal of Financial Intermediation, 5(2), 160-183.
Bhandari, A., Birinci, S., McGrattan, E., & See, K. (2020). What do survey data tell us about US businesses? American Economic Review: Insights, 2(4), 443-458.
Bharath, S., Pasquariello, P., & Wu, G. (2009). Does asymmetric information drive capital structure decisions? Review of Financial Studies, 22(8), 3211-3243.
Bolton, P., & Scharfstein, D. (1990). A theory of predation based on agency problems in financial contracting. American Economic Review, 80(1), 93-106.
Boot, A., & Thakor, A. (2011). Managerial autonomy, allocation of control rights, and optimal capital structure. Review of Financial Studies, 24(10), 3434-3485.
Brewer III, E., Kaufman, G., & Wall, L. (2008). Bank capital ratios across countries: why do they vary? Journal of Financial Services Research, 34, 177–201.
Brounen, D., de Jong, A., & Koedijk, K. (2004). Corporate finance in Europe: confronting theory with practice. Financial Management, 33(4), 71-101.
Brounen, D., de Jong, A., & Koedijk, K. (2006). Capital structure policies in Europe: survey evidence. Journal of Banking & Finance, 30(5), 1409-1442
Campello, M. (2003). Capital structure and product markets interactions: evidence from business cycles. Journal of Financial Economics, 68(3), 353-378.
Canhoto, A., & Dermine, J. (2003). A note on banking efficiency in Portugal, new vs. old banks. Journal of Banking and Finance, 27(11), 2087-2098.
Chung, K., & Smith II, R. (1987). Product quality, nonsalvage capital investment and the cost of financial leverage. In T. Copeland, Editor. Modern Finance and Industrial Economics, Chapter 9, 146-167. Basil Blackwell, New York (NY), USA.
Cornett, M., & Tehranian, H. (1994). An examination of voluntary versus involuntary securities issuances by commercial banks: the impact of capital regulations on common stock returns. Journal of Financial Economics, 35(1), 99-122.
Coutinho dos Santos, M., & Pacheco, L. (2006). Efeito nas cotações do anúncio de novas emissões de acções de bancos portugueses. Cadernos do Mercado de Valores Mobiliários, 24 (novembro), 242-255.
Coutinho dos Santos, M. (2003). Firm’s capital structure decisions: theory and empirical evidence from Portuguese banks. Unpublished Doctoral Thesis, University of Aveiro, Portugal.
Cronqvist, H., & Nilsson, M. (2005). The choice between rights offerings and private equity placements. Journal of Financial Economics, 78, 375-407.
D’Mello, R., & Farhat, R. (2008). A comparative analysis of proxies for an optimal leverage ratio. Review of Financial Economics, 17, 213-227.
DeAngelo, H., & Stulz, R. (2015). Liquid-claim production, risk management, and bank capital structure: why high leverage is optimal for banks. Journal of Financial Economics, 116(2), 219-236.
Demirgüç-Kunt, A., Detragiache, E., & Merrouche, O. (2013). Bank capital lessons from the financial crisis. Journal of Money, Credit and Banking, 45(6), 1147-1164.
Demsetz, R., Saidenberg, M., & Strahan, P. (1996). Banks with something to lose: the disciplinary role of franchise value. Federal Reserve Bank of New York. Economic Policy Review, October, 14 pages
Dewenter, K., & Malatesta, P. (2001). State-owned and privately owned firms: an empirical analysis of profitability, leverage, and labor intensity. American Economic Review, 91(1), 320-334.
De Jonghe, O., & Öztekin, Ö. 2015. Bank capital management: international evidence. Journal of Financial Intermediation 24: 154-177.
DeYoung, R., & Hasan, I. (1998). The performance of de novo commercial banks: a profit efficiency approach. Journal of Banking and Finance, 22(5), 565-587.
Diamond, D. & Rajan, R. (2000). A theory of bank capital. Journal of Finance, 55(6), 2431-2465. Dietrich, D., & Vollmer, U. (2004). Why do banks hold capital in excess of regulatory requirements?
A functional approach. IWH Discussion Papers 192, Halle Institute for Economic Research. Dillman, D. (1978). Mail and telephone surveys: the total design method. New York, Wiley- Interscience.
Ellul, A. (2009). Control motivations and capital structure decisions. Social Science Research Network Electronic Journal. DOI: http://dx.doi.org/10.2139/ssrn.1364661.
Fama, E. & K. French. 1998. Taxes, Financing Decisions, and Firm Value. Journal of Finance 53(3): 819-843.
Flannery, M., & Rangan, K. (2008). What caused the bank capital build-up of the 1990s? Review of Finance, 12 (2), 391-429.
Flannery, M. (1994). Debt maturity and the deadweight cost of leverage: optimally financing banking firms. American Economic Review, 84(1), 320-331.
Frank, M., & Goyal, V. (2009). Capital structure decisions: which factors are reliably important? Financial Management, 38(1), 1-37.
Gao, W., & Zhu, F. (2015). Information asymmetry and capital structure around the world. Pacific- Basin Finance Journal, 32(C), 131-159.
Graham, J., & Harvey, C. (2001). The theory and practice of corporate finance: evidence from the field. Journal of Financial Economics, 60(2-3), 187-243.
Greenbaum, S., Thakor, A., & Boot, A. (2016). Bank capital structure. In Contemporary Financial
Intermediation, 3rd Ed., Chapter 13, 317-327. Elsevier, Amsterdam, Netherlands.
Gropp, R., & Heider, F. (2010). The determinants of bank capital structure. Review of Finance, 14(4), 587-622.
Halov, N., & Heider, F. (2011). Capital structure, risk and asymmetric information. Quarterly Journal of Finance, 1(4), 767-809.
Harding, J., Liang, X., & Ross, S. 2013. Bank capital requirements, capital structure and regulation.
Journal of Financial Services Research, 43(2), 127-148.
Harhoff, D., & Körting, T. (1998). Lending relationships in Germany – empirical evidence from survey data. Journal of Banking and Finance, 22(10-11), 1317-1353.
Harris, M., & Raviv, A. (1991). The theory of capital structure. Journal of Finance, 46(1), 297-355. Hart, O., & Zingales, L. (2017). Companies should maximize shareholder welfare not market value. Journal of Law, Finance, and Accounting, 2, 247-274.
Hoque, H., & Kashefi-Pour, E. (2018). Bank-level and country-level determinants of bank capital structure and funding sources. International Journal of Finance & Economics, 23(4), 504-532. Jensen, M., & Meckling, W. (1976). Theory of the firm: managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3(4), 305-360.
Jensen, M. (2010). Value maximization, stakeholder theory, and the corporate objective function.
Journal of Applied Corporate Finance, 22(1), 32-42.
Jensen, M., Fama, E., Long Jr., J., Ruback, R., Schwert, G., Smith Jr., C., & Warner, J. (1989).
Editorial: clinical papers and their role in the development of financial economics. Journal of Financial Economics, 24(1), 3-6.
Keeley, M. (1989). The stock price effects of bank holding company securities issuance. Federal Reserve Bank of San Francisco Economic Review, Winter, 3-19.
Kwan, S. (2009). Capital structure in banking. FRBSF Economic Letter, Federal Reserve Bank of San Francisco 37(December) 1-4.
La Porta, R., Lopez-De-Silanes, F., & Shleifer, A. (2002). Government ownership of banks. Journal of Finance, 57(1), 265-301.
Leland, H., & Pyle, D. (1977). Information asymmetries, financial structure, and financial intermediation. Journal of Finance, 32(2), 371-387.
Leland, H. (1998). Agency costs, risk management, and capital structure. Journal of Finance, 53(4), 1213-1243.
Lemmon, M., & Zender, J. (2019). Asymmetric information, debt capacity, and capital structure.
Journal of Financial and Quantitative Analysis, 54(1), 31-59.
Lemmon, M., Roberts, M., & Zender, J. (2008). Back to the beginning: persistence and the cross-section of corporate capital structure. Journal of Finance, 63(4), 1575-1608.
Mao, C. (2003). Interaction of debt agency problems and optimal capital structure: theory and evidence. Journal of Financial and Quantitative Analysis, 38(2), 399-423.
Marcus, A. (1983). The bank capital decision: a time series-cross section analysis. Journal of Finance, 38(4), 1217-1232.
Margaritis, D., & Psillaki, M. (2010). Capital structure, equity ownership and firm performance. Journal of Banking & Finance, 34(3), 621-632.
Masulis, R. 1988. The Debt/Equity Choice. Ballinger Publishing Company, Pensacola (FL), USA. Megginson, W. (2005). The economics of bank privatization. Journal of Banking & Finance, 29(8-9), 1931-1980.
Mehran, H., & Thakor, A. (2011). Bank capital and value in the cross-section. Review of Financial Studies, 24(4), 1019-1067.
Mehrotra, V., Mikkelson, W., & Partch, M. (2005). Do managers have capital structure targets? Evidence from corporate spinoffs. Journal of Applied Corporate Finance, 17(1), 18-25.
Miller, M. (1977). Debt and taxes. Journal of Finance, 32(2), 261-275.
Miller, M. (1995). Do the M&M propositions apply to banks? Journal of Banking and Finance, 19(3-4), 483-489.
Modigliani, F., & Miller, M. (1958). The cost of capital, corporate finance and the theory of investment. American Economic Review, 48(3), 261-297.
Morellec, E., Nikolov, B., & Schürhoff, N. (2018). Agency conflicts around the world. Review of Financial Studies, 31(11), 4232-4287.
Orgler, Y., & Taggart, R. (1983). Implications of corporate capital structure theory for banking institutions. Journal of Money, Credit, and Banking, 15(2), 212-221.
Osterberg, W., & Thomson, J. (1996). Optimal financial structure and bank capital requirements: an empirical investigation. Journal of Financial Services Research, 10(4), 315-332.
Peura, S., & Keppo, J. (2006). Optimal bank capital with costly recapitalization. Journal of Business, 79(2), 163-201.
Ross, S. (1977). The determination of financial structure: the incentive-signalling approach. Bell Journal of Economics, 8(1), 23-40.
Santomero, A. & Watson, R. 1977. Determining an Optimal Capital Standard for the Banking Industry. Journal of Finance 32(4): 1267-1282
Schepens, G. (2016). Taxes and bank capital structure. Journal of Financial Economics, 120(3), 585-600.
Scholes, M., Wilson, P., & Wolfson, M. (1990). Tax planning, regulatory capital planning, and financial reporting strategy for commercial banks. Review of Financial Studies, 3(4), 625-650. Shirley, M., & Walsh, P. (2000). Public versus private ownership: the current state of the debate.
World Bank Policy Research Working Paper No. 2420.
Simon, H. (1997). An empirically based microeconomics. Cambridge University Press, Cambridge, UK.
Tufano, P. (2001). HBS-JFE conference volume: complementary research methods. Journal of Financial Economics, 60(2-3), 179-185.
Wall, L., & Peterson, P. (1998). The choice of capital instruments. Federal Reserve Bank of Atlanta Economic Review, (Second Quarter), 4-17.
Welch, I. 2011. Two Common Problems in Capital Structure Research: The Financial- Debt-To-Asset Ratio and Issuing Activity Versus Leverage Changes. International Review of Finance 11(1): 1-17.
Welch, I. 2006. Common Flaws in Empirical Capital Structure Research. Available at SSRN: http://ssrn.com/abstract=931675.