Risk and return of publicly held versus privately owned banks.

Federal Reserve Bank of New York Economic Policy Review, September, 2004 by Kwan, Simon H.; Strahan, Philip E.

1. INTRODUCTION

In their seminal work, Berle and Means (1932) point out that the separation of ownership and control in the modern corporation creates a condition whereby the interests of owner and manager may diverge and many of the checks that once operated to limit the use of power have disappeared. The agency theory, formalized by Jensen and Meckling (1976), posits that the agency costs of deviation from value maximization increase as managers' stakes decrease and ownership becomes more disperse.

Countering the incentive problems in the separation of ownership and control ...