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Article
Publication date: 1 February 1997

Mike Carhill

Core‐deposit franchises usually fetch substantial premiums when placed on the market. Those premiums are consistent with the “core‐deposit hypothesis:” because of…

Abstract

Core‐deposit franchises usually fetch substantial premiums when placed on the market. Those premiums are consistent with the “core‐deposit hypothesis:” because of limitations on competition (rationing of charters), deposits provide below‐market funds to financial intermediaries (Spellman, 1982, Chapter 3). However, two other hypotheses can explain core‐deposit premiums. The first holds that generally accepted accounting principles (GAAP) misallocate the costs of developing a core‐deposit base, by charging such costs against current income rather than capitalizing them as an asset; core‐deposit premiums merely represent a normal return to the costs of developing a core‐deposit base. The second holds that core‐deposit premiums arise from banks' good reputation (“goodwill”). A test which can discriminate between the three hypotheses is needed.

Details

Managerial Finance, vol. 23 no. 2
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 September 1997

James W. Wansley and Upinder S. Dhillon

This study examines the direct (out‐of‐pocket) flotation costs of new capital issues by bank holding companies between 1980 and 1986 and the total costs including any…

Abstract

This study examines the direct (out‐of‐pocket) flotation costs of new capital issues by bank holding companies between 1980 and 1986 and the total costs including any market effects of security issuance. A regression model is developed that relates the direct selling costs to the type of security being issued, the exchange on which the parent bank holding company is traded, information specific to the issue, and information specific to the firm. The model is highly significant, explaining over 80 percent of the variation in issuing costs. These direct costs, however, are small for equity issues when compared to information effects (stock price responses). When these costs are included, the costs to bank holding companies of issuing equity increase substantially and the direct costs of issuing preferred and debt are, generally, more than offset by positive stock price effects.

Details

Managerial Finance, vol. 23 no. 9
Type: Research Article
ISSN: 0307-4358

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