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Management quality, M-rating, and bank failures

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  • Prateek Sharma

    (University of Minnesota –Duluth)

Abstract

This paper studies bank managements’ role as information producers on borrowers and the effect of management quality on financial reporting quality, and solvency risk. We examine the relation between management quality at banks, measured as abnormal loan loss provisions (LLPs) and abnormal charge-offs, and the management component of CAMELS ratings (M-rating) from bank examinations. We find that banks with higher abnormal LLPs and charge-offs receive a lower M-rating. Alternate definitions and a range of robustness tests support our results. We also find that abnormal LLPs and abnormal charge-offs positively affect the hazard of bank failure. Our study also shows that differences in management quality between failed and a matched sample of non-failed banks were evident up to 4 years prior to failure, indicating that poor management quality is innate to bank failures.

Suggested Citation

  • Prateek Sharma, 2022. "Management quality, M-rating, and bank failures," SN Business & Economics, Springer, vol. 2(2), pages 1-32, February.
    • Handle: RePEc:spr:snbeco:v:2:y:2022:i:2:d:10.1007_s43546-021-00184-0
    DOI: 10.1007/s43546-021-00184-0
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    More about this item

    Keywords

    Management quality; CAMELS rating; Loan loss provisions; Bank failure;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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