I thank Bill Christie (Editor), an anonymous referee, seminar participants at the Federal Reserve Board, the Federal Reserve Bank of Cleveland, and participants of the 2011 Midwest Finance Association Annual Meetings, and the 2010 Financial Management Association Meetings for valuable comments.
Agency and Internal Capital Market Inefficiency: Evidence from Banking Organizations
Article first published online: 1 MAR 2012
© 2012 Financial Management Association International.
Volume 41, Issue 1, pages 35–53, Spring 2012
How to Cite
Holod, D. (2012), Agency and Internal Capital Market Inefficiency: Evidence from Banking Organizations. Financial Management, 41: 35–53. doi: 10.1111/j.1755-053X.2012.01177.x
- Issue published online: 28 MAR 2012
- Article first published online: 1 MAR 2012
Using banking data, I provide evidence that agency problems are at the root of internal capital market inefficiency. I find that publicly traded bank holding companies (BHCs) are less efficient in their internal capital allocation than nonpublicly traded BHCs. This suggests that the divergence of interests between the chief executive officer and the shareholders is an important source of the internal capital misallocation. I also demonstrate that BHCs incorporating a tiered organizational structure are less efficient than nontiered BHCs, but only within a sample of BHCs that are publicly traded. These findings imply that a greater degree of rent-seeking activity by division managers contributes to internal capital market inefficiency only if the top manager is an agent. This is consistent with theoretical models that explain internal capital misallocations through the multiple layers of agency within an organization.