The Journal of Finance

Corporate Control, Portfolio Choice, and the Decline of Banking

Published: 12/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb05183.x

GARY GORTON, RICHARD ROSEN

In the 1980s, U.S. banks became systematically less profitable and riskier as nonbank competition eroded the profitability of banks' traditional activities. Bank failures rose exponentially during this decade. The leading explanation for the persistence of these trends centers on fixed‐rate deposit insurance: the insurance gives bank equityholders 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 played a more important role than did the moral hazard associated with deposit insurance in explaining the recent behavior of the banking industry.

Eat or Be Eaten: A Theory of Mergers and Firm Size

Published: 05/20/2009   |   DOI: 10.1111/j.1540-6261.2009.01465.x

GARY GORTON, MATTHIAS KAHL, RICHARD J. ROSEN

We propose a theory of mergers that combines managerial merger motives with an industry‐level regime shift that may lead to value‐increasing merger opportunities. Anticipation of these merger opportunities can lead to defensive acquisitions, where managers acquire other firms to avoid losing private benefits if their firms are acquired, or “positioning” acquisitions, where firms position themselves as more attractive takeover targets to earn takeover premia. The identity of acquirers and targets and the profitability of acquisitions depend on the distribution of firm sizes within an industry, among other factors. We find empirical support for some unique predictions of our theory.