[We develop a dynamic model of bank capital structure in an acquisitions context which predicts: (i) total bank value and the bank's equity capital are positively correlated in the cross-section, and (ii) the various components of bank value are also positively cross-sectionally related to bank capital. Our empirical tests provide strong support for these predictions. The results are robust to a variety of alternative explanations—growth prospects, desire to acquire toe-hold positions, desire of capital-starved acquirers to buy capital-rich targets, market timing, pecking order, the effect of banks with binding capital requirements, Too Big To Fail, target profitability, risk, and mechanical effects.]

[The critical role played by financial institutions in the recent financial crises has generated renewed interest on the corporate finance of the banking firm and the impact of the banking sector on the real economy. This paper introduces the special issue of the Review of Financial Studies dedicated to "The Value of Bank Capital and the Structure of the Banking Industry." The special issue combines papers presented at the conference on "Corporate Finance of Financial Intermediaries" in September 2006, which was jointly organized by the Federal Reserve Bank of New York, the Wharton Financial Institutions Center of the University of Pennsylvania, and the Review of Financial Studies, with other related papers.]

We develop a dynamic model of bank capital structure in an acquisitions context which predicts: (i) total bank value and the bank's equity capital are positively correlated in the cross-section, and (ii) the various components of bank value are also positively cross-sectionally related to bank capital. Our empirical tests provide strong support for these predictions. The results are robust to a variety of alternative explanations--growth prospects, desire to acquire toe-hold positions, desire of capital-starved acquirers to buy capital-rich targets, market timing, pecking order, the effect of banks with binding capital requirements, Too Big To Fail, target profitability, risk, and mechanical effects. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.

The critical role played by financial institutions in the recent financial crises has generated renewed interest on the corporate finance of the banking firm and the impact of the banking sector on the real economy. This paper introduces the special issue of the Review of Financial Studies dedicated to “The Value of Bank Capital and the Structure of the Banking Industry.” The special issue combines papers presented at the conference on “Corporate Finance of Financial Intermediaries” in September 2006, which was jointly organized by the Federal Reserve Bank of New York, the Wharton Financial Institutions Center of the University of Pennsylvania, and the Review of Financial Studies, with other related papers.