COMMERCIAL BANK DIRECTOR/OFFICER LIABILITY EXPOSURE AND THE AGENCY ISSUE

This paper presents the results of a survey of 1000 U.S. Commercial Banks concerning their perception of and reaction to liability exposure. Also, the paper presents an application of the Modigliani‐Miller Capital Structure Model to illustrate the process by which liability exposure subjects the bank to financial leverage through lawsuits which may result in a dramatic reduction in shareholder wealth.