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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, little evidence exists on market influence, and then only for stockholders and for rare events such as management turnover. This paper seeks evidence that U.S. bank holding companies' security price reliably influence subsequent managerial actions. Although we identify some patterns consistent with beneficial market influences, we have not found strong evidence that stock or (especially) bond investors regularly influence managerial actions. Market influence remains, for the moment, more a matter of faith than of empirical evidence.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-00-3.

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Date of creation: 2000
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Handle: RePEc:fip:fedhwp:wp-00-3

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Keywords: Bank holding companies ; Bank supervision ; Bonds ; Stocks;

References

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  1. Ellis, David M. & Flannery, Mark J., 1992. "Does the debt market assess large banks, risk? : Time series evidence from money center CDs," Journal of Monetary Economics, Elsevier, vol. 30(3), pages 481-502, December.
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