Dmytro Holod

Agency and Internal Capital Market Inefficiency: Evidence from Banking Organizations

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 non-publicly traded BHCs. This suggests that the divergence of interests between the CEO and the shareholders is an important source of the internal capital misallocation. I also show that BHCs that have a tiered organizational structure are less efficient than non-tiered BHCs, but only within a sample of BHCs that are publicly traded. These findings imply that a greater degree of rent-seeking activity by the division manager contributes to the internal capital market inefficiency only if the top manager herself is an agent. This is consistent with theoretical models that explain internal capital misallocations through the multiple layers of agency within an organization.

The Value to Banks of Small Business Lending

By estimating the market premium placed on the small business loan portfolios of banking organizations, this study provides direct evidence on the value to banks arising from relationship lending. Using data from the small business loan survey contained in the June bank call reports, we find that small commercial and industrial loans do, in fact, add value for smaller banking organizations, both in absolute terms and relative to the value contributed by larger commercial and industrial loans. Interestingly, the value-enhancing effect emanates primarily from the smallest loans, those with original values of

Capital Constraints, Asymmetric Information, and Internal Capital Markets in Banking: New Evidence

100,000 or less. On the other hand, small commercial real estate loans, being transactional rather than relationship in nature, do not contribute additional value to banking organizations relative to larger commercial real estate loans.