Notes On Bank Ownership And Performance

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Bank Ownership and Performance Introduction In this paper we investigate the relationship between ownership structure and firm performance in the American financial industry. There has been a lot of research done dealing with the issue of ownership and firm performance since Berle and Means (1932, with critical discussions on how to align the manager’s interests to that of the shareholders. Berle and Means (1932) hypothesised that firms that are controlled by the management should be less profitable than owner controlled firms. This is known as the “incentive alignment theory” which states that the more equity a manager owns the more inclined he or she is to increase performance because it means better alignment of the monetary incentives between the manager and other equity owners according to Jensen and Meckling (1976). The “Takeover premium theory” also states that that more equity ownership by the manager should improve performance as managers that own a large portion of the stock are more capable to fight takeover bids, therefore increasing the chances that a higher takeover premium will have to be paid, Stulz (1988). However, there has also been some research done that shows the opposite relationship. Morck, Shleifer and Vishny (1988) put forward the “entrenchment theory” which states that higher levels of equity ownership by the manager may lower the corporate performance of the firms. This is because managers with large portions of

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