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Market Discipline in the Governance of U.S. Bank Holding Companies: Monitoring vs. Influencing

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  • Robert R. Bliss
  • Mark J. Flannery

Abstract

Market discipline is an article of faith among financial economists, and the use of market discipline as a regulatory tool is gaining credibility. Effective market discipline involves two distinct components: security holders' ability to accurately assess the condition of a firm (monitoring) and their ability to cause subsequent managerial actions to reflect those assessments (influence). Substantial evidence supports the existence of market monitoring. However, the existing evidence about market influence involves relatively rare events such as management turnover. This paper seeks evidence that U.S. bank holding companies' security price changes reliably influence subsequent managerial actions. Although we identify some patterns consistent with beneficial market influences, our methodology does not provide strong evidence that stock or (especially) bond investors regularly influence managerial actions. Day-to-day market influence remains, for the moment, more a matter of faith than of empirical evidence. JEL classification codes: G21, G38, G14

Suggested Citation

  • Robert R. Bliss & Mark J. Flannery, 2002. "Market Discipline in the Governance of U.S. Bank Holding Companies: Monitoring vs. Influencing," Review of Finance, European Finance Association, vol. 6(3), pages 361-396.
    • Handle: RePEc:oup:revfin:v:6:y:2002:i:3:p:361-396.
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    File URL: http://hdl.handle.net/10.1023/A:1022021430852
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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