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Who's minding the store? motivating and monitoring hired managers at small, closely held firms: the case of commercial banks

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  • Robert DeYoung
  • Kenneth Spong
  • Richard J. Sullivan

Abstract

We test whether the gains from hiring an outside manager exceed the principal-agent costs of owner-manager separation at 266 small, closely held U.S. commercial banks. Our results suggest that hiring an outside manager can improve a bank's profit efficiency, but that these gains depend on aligning the hired managers with owners via managerial shareholdings. We find that over-utilizing this control mechanism results in entrenchment, while under-utilization is costly in terms of foregone profits. This study provides a relatively unfettered test of mitigating principal-agent costs, because these small banks cannot rely on market forces or blocks of outside investors to monitor managers.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-99-17.

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Date of creation: 1999
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Handle: RePEc:fip:fedhwp:wp-99-17

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Keywords: Small business ; Banks and banking - Costs ; Bank management;

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Cited by:
  1. Lisa Barrow & Cecilia Elena Rouse, 2000. "Using market valuation to assess the importance and efficiency of public school spending," Working Paper Series WP-00-4, Federal Reserve Bank of Chicago.
  2. Robert R. Bliss & Mark J. Flannery, 2000. "Market discipline in the governance of U.S. Bank Holding Companies: monitoring vs. influencing," Working Paper Series WP-00-3, Federal Reserve Bank of Chicago.

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