Essays in corporate finance and banking
The effective management of conflicts between owners, management, and creditors is important to the well functioning of any firm. In the banking industry, these conflicts become especially important in light of the importance of stability of the banking system to the well functioning of the overall economy. Widespread conflicts of interest between bank owners and mangers or between bank owners and creditors could reduce confidence in the banking industry and cause repercussions throughout the overall economy. The primary purpose of this dissertation is to explore a few manifestations of these problems in banks through two empirical essays.
The traditional literature in corporate finance has often ignored financial firms. This is largely because financial firms are different in many important ways. Firstly, financial firms are often heavily regulated; this could distort the incentives of owners, creditors, and managers of financial firms. Second, financial firms are financial intermediaries and thus have a much higher levels of financial leverage and usually obtain financing in ways that vary significantly from non-financial firms.
This dissertation focuses primarily on banks, a particular type of financial firm. To highlight some of the important differences between banks and non-financial firms, the first chapter of this dissertation provides an overview of the banking industry with an emphasis on the U.S. banking sector. Chapter two, my job market paper, is the first of my essays. This paper examines how market discipline by uninsured depositors, aggressive competition, and the convenience orientation of some deposit investors can affect bank deposit pricing policies in distressed banks. The results suggest the creditor-owner conflict in distressed banks is systematically affected by these forces. The final chapter consists of my second paper which is jointly authored with Yaniv Grinstein. It finds that banks that have less stringent corporate governance mechanisms tend to lend more to their executives and that these banks also have poorer subsequent performance. This suggests that banks with weaker governance mechanisms may be violating the spirit of bank regulations, which set strict limits on executive lending.