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Market discipline in the governance of U.S. Bank Holding Companies: monitoring vs. influencing

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Author Info
Robert R. Bliss
Mark J. Flannery

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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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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;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. David Hirshleifer & Anjan V. Thakor, 1998. "Corporate Control Through Board Dismissals and Takeovers," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 7(4), pages 489-520, December. [Downloadable!] (restricted)
  2. Cannella Jr., Albert A. & Fraser, Donald R. & Lee, D. Scott, 1995. "Firm failure and managerial labor markets Evidence from Texas banking," Journal of Financial Economics, Elsevier, vol. 38(2), pages 185-210, June. [Downloadable!] (restricted)
  3. Crabbe, Leland & Post, Mitchell A, 1994. " The Effect of a Rating Downgrade on Outstanding Commercial Paper," Journal of Finance, American Finance Association, vol. 49(1), pages 39-56, March. [Downloadable!] (restricted)
  4. Robert DeYoung & Mark J. Flannery & William W. Lang & Sorin M. Sorescu, 1998. "The informational advantage of specialized monitors: the case of bank examiners," Working Paper Series WP-98-4, Federal Reserve Bank of Chicago. [Downloadable!]
  5. Mikkelson, Wayne H. & Partch, M. Megan, 1997. "The decline of takeovers and disciplinary managerial turnover," Journal of Financial Economics, Elsevier, vol. 44(2), pages 205-228, May. [Downloadable!] (restricted)
  6. Allen N. Berger, 1991. "Market discipline in banking," Proceedings, Federal Reserve Bank of Chicago, pages 419-437.
  7. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January. [Downloadable!] (restricted)
  8. Kaplan, Steven N, 1994. "Top Executive Rewards and Firm Performance: A Comparison of Japan and the United States," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 510-46, June. [Downloadable!] (restricted)
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  10. Brickley, James A & James, Christopher M, 1987. "The Takeover Market, Corporate Board Composition, and Ownership Structure: The Case of Banking," Journal of Law & Economics, University of Chicago Press, vol. 30(1), pages 161-80, April.
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    Other versions:
  12. Martin, Kenneth J & McConnell, John J, 1991. " Corporate Performance, Corporate Takeovers, and Management Turnover," Journal of Finance, American Finance Association, vol. 46(2), pages 671-87, June. [Downloadable!] (restricted)
  13. Cotter, James F. & Shivdasani, Anil & Zenner, Marc, 1997. "Do independent directors enhance target shareholder wealth during tender offers?," Journal of Financial Economics, Elsevier, vol. 43(2), pages 195-218, February. [Downloadable!] (restricted)
  14. James S. Ang & Rebel A. Cole & James Wuh Lin, 2000. "Agency Costs and Ownership Structure," Journal of Finance, American Finance Association, vol. 55(1), pages 81-106, 02. [Downloadable!] (restricted)
  15. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June. [Downloadable!] (restricted)
  16. Denis, David J & Denis, Diane K, 1995. " Performance Changes Following Top Management Dismissals," Journal of Finance, American Finance Association, vol. 50(4), pages 1029-57, September. [Downloadable!] (restricted)
  17. Robert DeYoung & Kenneth Spong & Richard J. Sullivan, 1999. "Who's minding the store? motivating and monitoring hired managers at small, closely held firms: the case of commercial banks," Working Paper Series WP-99-17, Federal Reserve Bank of Chicago. [Downloadable!]
  18. Kwan, Simon H., 1996. "Firm-specific information and the correlation between individual stocks and bonds," Journal of Financial Economics, Elsevier, vol. 40(1), pages 63-80, January. [Downloadable!] (restricted)
  19. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September. [Downloadable!] (restricted)
    Other versions:
  20. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Andrea Sironi, 2000. "Testing for market discipline in the European banking industry: evidence from subordinated debt issues," Finance and Economics Discussion Series 2000-40, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  2. Fred Furlong & Simon Kwan, 2006. "Safe and sound banking, 20 years later: what was proposed and what has been adopted," Working Paper Series 2006-27, Federal Reserve Bank of San Francisco. [Downloadable!]
  3. Douglas D. Evanoff & Larry D. Wall, 2000. "Subordinated debt and bank capital reform," Working Paper 2000-24, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  4. Andrea Sironi, 2000. "An analysis of European banks SND issues and its implications for the design of a mandatory subordinated debt policy," Finance and Economics Discussion Series 2000-41, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  5. Beverly Hirtle, 2007. "Public disclosure, risk, and performance at bank holding companies," Staff Reports 293, Federal Reserve Bank of New York. [Downloadable!]
  6. David G. Mayes, 2004. "An approach to bank insolvency in transition and emerging economies," Finance 0404015, EconWPA. [Downloadable!]
    Other versions:
  7. Douglas D. Evanoff & Larry D. Wall, 2001. "Sub-debt yield spreads as bank risk measures," Working Paper Series WP-01-03, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  8. Daniel M. Covitz & Diana Hancock & Myron L. Kwast, 2004. "Market discipline in banking reconsidered: the roles of funding manager decisions and deposit insurance reform," Finance and Economics Discussion Series 2004-53, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  9. Simon H. Kwan, 2004. "Testing the strong-form of market discipline: the effects of public market signals on bank risk," Working Papers in Applied Economic Theory 2004-19, Federal Reserve Bank of San Francisco. [Downloadable!]
  10. Andrea Sironi, 2001. "Testing for market discipline in the European banking industry: evidence from subordinated debt issues," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 366-384.
  11. Penas, M.F. & Tumer-Alkan, G., 2008. "Bank Disclosure and Market Assessment of Financial Fragility: Evidence from Banks' Equity Prices," Discussion Paper 2008-013, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
  12. Andrea M. Maechler & Kathleen McDill, 2003. "Dynamic Depositor Discipline in U.S. Banks," IMF Working Papers 03/226, International Monetary Fund. [Downloadable!]
  13. Francesco Cannata & Mario Quagliariello, . "Market and Supervisory Information: Some Evidence from Italian Banks," Discussion Papers 04/04, Department of Economics, University of York. [Downloadable!]
  14. Frederick T. Furlong & Simon Kwan, 2006. "Safe & sound banking, 20 years later: what was proposed and what has been adopted," Proceedings, Federal Reserve Bank of San Francisco. [Downloadable!]
  15. David T. Llewellyn, 2001. "A Regulatory Regime for Financial Stability," Working Papers 48, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
  16. Frederick T. Furlong & Robard Williams, 2006. "Financial market signals and banking supervision: are current practices consistent with research findings?," Economic Review, Federal Reserve Bank of San Francisco, pages 17-29. [Downloadable!]
  17. C. N. V. Krishnan & P. H. Ritchken & J. B. Thomson, 2003. "Monitoring and controlling bank risk: does risky debt serve any purpose?," Working Paper 0301, Federal Reserve Bank of Cleveland. [Downloadable!]
  18. Robert R. Bliss, 2001. "Market discipline and subordinated debt: a review of some salient issues," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 24-45. [Downloadable!]
  19. Franz R. Hahn, . "Macroprudential Financial Regulation and Monetary Policy," WIFO Working Papers 154, WIFO. [Downloadable!]
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