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Subchapter S, An Entrepreneurial Survival Strategy for Small Banks

Author

Listed:
  • Steven G. Craig

    (University of Houston)

  • Polly T. Hardee

    (University of Houston)

Abstract
With the passage of the Small Business Job Protection Act of 1996, many small banks throughout the United States became eligible to reorganize as a Subchapter S corporation. This allows these banks to eliminate double taxation, and increase shareholder value. Consequently, employing this entrepreneurial survival tool extends “new life†to the small bank. Accompanying this strategy are differences in corporate governance, primarily more concentration of ownership. Thus, this paper examines the behavior of Subchapter S banks as compared to banks of similar size in order to determine significant performance differences. It also focuses on bank structure and small business lending activity, an area of high asset concentration in small banks. Overall, we find shareholder value appears to increase in a Subchapter S banking organization through higher earnings, larger dividend payout ratios, and similar risk measures. We find little differences in these banks in relation to small business lending. The implications are that a small bank’s survival rate will be higher in the consolidation process by employing the Subchapter S strategy.

Suggested Citation

  • Steven G. Craig & Polly T. Hardee, 2002. "Subchapter S, An Entrepreneurial Survival Strategy for Small Banks," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 7(3), pages 53-60, Fall.
    • Handle: RePEc:pep:journl:v:7:y:2002:i:3:p:53-60
    as

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    References listed on IDEAS

    as
    1. William R. Keeton, 1995. "Multi-office bank lending to small businesses: some new evidence," Economic Review, Federal Reserve Bank of Kansas City, vol. 80(Q II), pages 45-57.
    2. Strahan, Philip E. & Weston, James P., 1998. "Small business lending and the changing structure of the banking industry1," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 821-845, August.
    3. Jayaratne, Jith & Wolken, John, 1999. "How important are small banks to small business lending?: New evidence from a survey of small firms," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 427-458, February.
    4. Goldberg, Lawrence G. & White, Lawrence J., 1998. "De novo banks and lending to small businesses: An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 851-867, August.
    5. Loretta J. Mester, 1997. "What's the point of credit scoring?," Business Review, Federal Reserve Bank of Philadelphia, issue Sep, pages 3-16.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Banks; Small Banks; Subchapter S; S-Corp; Survival;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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