Corporate Finance and Financial Institutions

Many corporate finance researchers have avoided analyzing financial institutions, perhaps on the grounds that they are “unique” or “different” from other types of firms. This assessment reflects some unusual features of financial firms' liabilities and a set of governmental regulatory restrictions that have become less pervasive in recent years. In fact, corporate finance theory applies equally well to financial firms, although some modifications are required to recognize the effects of government safety and soundness regulation. Regulated firms' private incentives account for most of the difficulties regulators encounter when trying to craft appropriate oversight mechanisms