TY  - JOUR
AU  - Gorton,Gary
AU  - Rosen,Richard
TI  - Corporate Control, Portfolio Choice, and the Decline of Banking
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4247
PY  - 1992
Y2  - December 1992
UR  - http://www.nber.org/papers/w4247
L1  - http://www.nber.org/papers/w4247.pdf
N1  - Author contact info:
Gary B. Gorton
Yale School of Management
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
Fax: 203/432-8931
E-Mail: Gary.Gorton@yale.edu

Richard Rosen
AB  - In the last two decades U.S. banks have become systematically less profitable and riskier as nonbank competition has eroded the profitability of banks' traditional activities. Bank failures, insignificant from 1934, the date the Glass-Steagall Act was passed, until 1980, rose exponentially in the 1980s. The leading explanation for the persistence of these trends centers on fixed-rate deposit insurance: the insurance gives bank shareholders an incentive to take on risk when the value of bank charters falls. We propose and test an alternative explanation based on corporate control considerations. We show that managerial entrenchment, more than moral hazard associated with deposit insurance, explains the recent behavior of the banking industry.
ER  -