Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/325035 
Year of Publication: 
2025
Series/Report no.: 
CESifo Working Paper No. 12044
Publisher: 
CESifo GmbH, Munich
Abstract: 
Using a large sample of US Bank Holding Companies during 1995-2023, we find that a standard measure of franchise value predicts lower bank capitalization and higher bank risk of insolvency. The franchise value hypothesis (FVH), postulating a negative relationship between bank franchise value and bank risk-taking, is thus rejected in our sample. We then construct proxy measures of bank pricing power rents and rents due to government guarantees, and show that an increase in either type of rents is associated with higher franchise values. Furthermore, higher rents are positively and significantly associated with higher operating costs, suggesting the existence of a rent-efficiency trade-off. To rationalize our empirical findings, we calibrate two standard financial models of the banking firm and examine the theoretical implications of a banking industry model featuring imperfect competition, agency costs, and endogenous market structure. These models support FVH incentive mechanism, but equilibrium outcomes do not necessarily imply a negative relationship between franchise value and bank risk-taking.
Subjects: 
Tobin Q
bank risk of insolvency
bank rents
JEL: 
C21
E44
G21
Document Type: 
Working Paper
Appears in Collections:

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.