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Alternative methods of corporate control in commercial banks

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  • Stephen D. Prowse
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    Abstract

    In this article, Stephen Prowse investigates how owners of commercial banks encourage management to follow value-maximizing policies. While the "corporate control mechanism" in nonfinancial firms is well documented, for the banking industry much less evidence is available. Moreover, unique factors in the operating environment of commercial banks may mean that their corporate control mechanism operates differently from that of nonfinancial firms. ; Prowse analyzes a sample of bank holding companies (BHCs) from 1987 to 1992 to determine how many underwent a change in corporate control by hostile takeover, friendly merger, action by the board of directors, or intervention by regulators. Prowse finds that the primary market-based corporate control mechanism among BHCs is action by the board, although bank boards appear to be much less assertive than boards of nonfinancial firms. Overall, the market-based corporate control mechanisms in banks do not appear as efficient at disciplining managers as they are in other firms. By default, this has given a primary role to regulators to provide a "last resort" control mechanism. Prowse analyzes reasons for this and evaluates how proposed banking legislation might affect corporate governance.

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    File URL: http://www.dallasfed.org/assets/documents/research/er/1995/er9503c.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

    Volume (Year): (1995)
    Issue (Month): Q III ()
    Pages: 24-36

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    Handle: RePEc:fip:fedder:y:1995:i:qiii:p:24-36

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    Keywords: Banks and banking ; Corporations;

    References

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    1. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
    2. John H. Boyd & Mark Gertler, 1994. "Are banks dead? or, are the reports greatly exaggerated?," Proceedings 25, Federal Reserve Bank of Chicago.
    3. Gary Gorton & Richard Rosen, 1994. "Corporate Control, Portfolio Choice, and the Decline of Banking," Center for Financial Institutions Working Papers 95-09, Wharton School Center for Financial Institutions, University of Pennsylvania.
    4. Jensen, M.C. & Murphy, K.J., 1988. "Performance Pay And Top Management Incentives," Papers 88-04, Rochester, Business - Managerial Economics Research Center.
    5. Benjamin E. Hermalin & Michael S. Weisbach, 1988. "The Determinants of Board Composition," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 589-606, Winter.
    6. Randall Morck & Andrel Shleifer & Robert W. Vishny, 1988. "Alternative Mechanisms for Corporate Control," University of Chicago - George G. Stigler Center for Study of Economy and State 52, Chicago - Center for Study of Economy and State.
    7. Mark E. Levonian, 1995. "Why banking isn't declining," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jan20.
    8. Brickley, James A & James, Christopher M, 1987. "The Takeover Market, Corporate Board Composition, and Ownership Structure: The Case of Banking," Journal of Law and Economics, University of Chicago Press, vol. 30(1), pages 161-80, April.
    9. George G. Kaufman & Larry R. Mote, 1994. "Is banking a declining industry? A historical perspective," Economic Perspectives, Federal Reserve Bank of Chicago, issue May, pages 2-21.
    10. Baradwaj, Babu G. & Fraser, Donald R. & Furtado, Eugene P. H., 1990. "Hostile bank takeover offers : Analysis and implications," Journal of Banking & Finance, Elsevier, vol. 14(6), pages 1229-1242, December.
    11. Timothy H. Hannan & Ferdinand Mavinga, 1980. "Expense Preference and Managerial Control: the Case of the Banking Firm," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 671-682, Autumn.
    12. James, Christopher, 1984. "An Analysis of the Effect of State Acquisition Laws on Managerial Efficiency: The Case of the Bank Holding Company Acquisitions," Journal of Law and Economics, University of Chicago Press, vol. 27(1), pages 211-26, April.
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    Cited by:
    1. Christophe Godlewski, 2004. "Modélisation de la Prévision de Défaillance Bancaire et Facteurs Réglementaires Une Application aux Banques des Pays Emergents," Finance 0409027, EconWPA.
    2. Philip E. Strahan, 2004. "Commentary on "Risk and return of publicly held versus privately owned banks"," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 109-113.
    3. Garci­a-Marco, Teresa & Robles-Fernández, M. Dolores, 2008. "Risk-taking behaviour and ownership in the banking industry: The Spanish evidence," Journal of Economics and Business, Elsevier, vol. 60(4), pages 332-354.
    4. Karima Bouaiss & Christine Marsal, 2009. "Les mécanismes internes de gouvernance dans les banques:un état de l'art," Revue Finance Contrôle Stratégie, revues.org, vol. 12(1), pages 93-126, March.
    5. Robert R. Moore, 1997. "Bank acquisition determinants: implications for small business credit," Financial Industry Studies Working Paper 97-2, Federal Reserve Bank of Dallas.
    6. Crespi, Rafel & Garcia-Cestona, Miguel A. & Salas, Vicente, 2004. "Governance mechanisms in Spanish banks. Does ownership matter?," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2311-2330, October.
    7. Laetitia Lepetit & Amine Tarazi & Nadia Zedek, 2012. "Bank Regulatory Capital Adjustment and Ultimate Ownership Structure: Evidence from European Commercial Banks," Working Papers hal-00918577, HAL.
    8. Christophe Godlewski, 2004. "Excess Credit Risk and Bank’s Default Risk An Application of Default Prediction’s Models to Banks from Emerging Market Economies," Finance 0409028, EconWPA.
    9. Rebecca S. Demsetz & Marc R. Saidenberg & Philip E. Strahan, 1997. "Agency problems and risk taking at banks," Staff Reports 29, Federal Reserve Bank of New York.
    10. Laetitia Lepetit & Amine Tarazi & Nadia Zedek, 2012. "Ultimate Ownership Structure and Bank Regulatory Capital Adjustment: Evidence from European Commercial Banks," Working Papers hal-00918579, HAL.
    11. Joseph G. Haubrich & James B. Thomson, 1998. "Large shareholders and market discipline in a regulated industry: a clinical study of Mellon Bank," Working Paper 9803, Federal Reserve Bank of Cleveland.
    12. Christophe Godlewski, 2004. "Modélisation de la Prévision de Défaillance Bancaire Une Application aux Banques des Pays Emergents," Finance 0409026, EconWPA.
    13. Palvia, Ajay A., 2011. "Banks and managerial discipline: Does regulatory monitoring play a role?," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(1), pages 56-68, February.
    14. Azofra, Valentín & Santamaría, Marcos, 2011. "Ownership, control, and pyramids in Spanish commercial banks," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1464-1476, June.
    15. Irina Barakova & Ajay Palvia, 2010. "Limits to relative performance evaluation: evidence from bank executive turnover," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 2(3), pages 214-236, August.
    16. Köhler, Matthias, 2008. "Blockholdings and Corporate Governance in the EU Banking Sector," ZEW Discussion Papers 08-110, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    17. Gropp, Reint & Köhler, Matthias, 2010. "Bank owners or bank managers: who is keen on risk? Evidence from the financial crisis," ZEW Discussion Papers 10-013, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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