Bank consolidation is a global phenomenon that may enhance stakeholders' value if managers do not sacrifice value to build empires. We find strong evidence of managerial entrenchment at U.S. bank holding companies that have higher levels of managerial ownership, better growth opportunities,...

The authors suggest that risk plays an important role in managerial production decisions. Managers make implicit and explicit decisions related to risk, return, and cost in setting target market, product, pricing and delivery decisions. Standard models of production and cost do not explicitly...

This paper explores how to incorporate banks' capital structure and risk-taking into models of production. In doing so, the paper bridges the gulf between (1) the banking literature that studies moral hazard effects of bank regulation without considering the underlying microeconomics of...

For nearly two decades banks in the United States have consolidated in record numbers—in terms of both frequency and the size of the merging institutions. Rhoades (1996) hypothesizes that the main motivations were increased potential for geographic expansion created by changes in state laws...

We argue for a shift in the focus of modeling production from the traditional assumptions of profit maximization and cost minimization to a more general assumption of managerial utility maximization that can incorporate risk incentives into the analysis of production and recover value-maximizing...

Our paper explores the optimal financial contract for a large investor with potential control over a firm's investment decisions. We show that an optimally designed menu of claims for a large investor will include features resembling a U.S. version of lender liability doctrine, equitable...

Do checking accounts help banks monitor borrowers? A borrower’s checking account provides a bank with exclusive access to a continuous stream of borrower data, namely, the borrower’s checking account balances at the bank. Using a unique set of data that includes monthly and annual...

We provide evidence on the costs and profitability of relationship lending by banks. We derive bank-specific measures of loan rate smoothing for small business borrowers in response to exogenous shocks to their credit risk and to interest rates, and then estimate cost and profit functions to...

We investigate the sources of recent changes in the performance of U.S. banks using concepts and techniques borrowed from the cross-section efficiency literature. Our most striking result is that during 1991-1997, cost productivity worsened while profit productivity improved substantially,...

During several episodes of declining or rising interest rate changes in the 1980s and 1990s, credit card rates changed little. At the same time, credit cards consistently earned higher returns than most other bank products. Ausenbel (1991) argues the reason is that the industry deviates from a...