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Do Stock Markets Discipline US Bank Holding Companies: Just Monitoring, or also In?uencing?

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  • L. BAELE
  • V. DE BRUYCKERE
  • O. DE JONGHE

    ()

  • R. VANDER VENNET

Abstract

This paper presents evidence that bank managers adjust key strategic variables following a risk and/or valuation signal from the stock market. Banks receive a risk signal when they exhibit substantially higher volatility compared to the best performing bank(s) with similar business model characteristics, and a valuation signal when they are undervalued relative to the average bank with similar characteristics (using respectively a stochastic frontier and multiplicative heteroscedasticity model). We show that the likelihood that banks receive a risk and/or valuation signal increases with opaqueness, managerial discretion and specialization. Next, we show, using a partial adjustment model, that bank managers adjust the long- term target value of key strategic variables and the speed of adjustment towards those targets following a risk and/or negative valuation signal. We interpret this as evidence of stock market in?uencing. Finally, we show that our results are unlikely to be driven by indirect in?uencing by regulators, subordinated debtholders, or wholesale depositors.

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Bibliographic Info

Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 12/827.

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Length: 52 pages
Date of creation: Dec 2012
Date of revision:
Handle: RePEc:rug:rugwps:12/827

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Related research

Keywords: monitoring; in?uencing; stochastic frontier; multiplicative heteroscedasticity regression; partial adjustment; opaqueness; earnings forecast dispersion; bank risk;

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References

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  1. Rocco Huang & Lev Ratnovski, 2009. "The dark side of bank wholesale funding," Working Papers 09-3, Federal Reserve Bank of Philadelphia.
  2. Laeven, Luc & Majnoni, Giovanni, 2003. "Loan loss provisioning and economic slowdowns: too much, too late?," Journal of Financial Intermediation, Elsevier, vol. 12(2), pages 178-197, April.
  3. Mark Flannery, 2001. "The Faces of “Market Discipline”," Journal of Financial Services Research, Springer, vol. 20(2), pages 107-119, October.
  4. Klaus Schaeck & Martin Cihak & Andrea Maechler & Stephanie Stolz, 2011. "Who Disciplines Bank Managers?," Review of Finance, European Finance Association, vol. 16(1), pages 197-243.
  5. Cerqueiro, Geraldo & Degryse, Hans & Ongena, Steven, 2007. "Rules versus Discretion in Loan Rate Setting," CEPR Discussion Papers 6450, C.E.P.R. Discussion Papers.
  6. Charles W. Calomiris & Doron Nissim, 2007. "Activity-Based Valuation of Bank Holding Companies," NBER Working Papers 12918, National Bureau of Economic Research, Inc.
  7. Rüdiger FAHLENBRACH & Robert PRILMEIER & René M. STULZ, . "This Time Is the Same: Using Bank Performance in 1998 to Explain Bank Performance During the Recent Financial Crisis," Swiss Finance Institute Research Paper Series 11-19, Swiss Finance Institute.
  8. Albagli, Elias & Hellwig, Christian & Tsyvinski, Aleh, 2011. "Information Aggregation, Investment, and Managerial Incentives," CEPR Discussion Papers 8539, C.E.P.R. Discussion Papers.
  9. Allen N. Berger & Sally M. Davies & Mark J. Flannery, 2000. "Comparing market and supervisory assessments of bank performance: who knows what when?," Proceedings, Federal Reserve Bank of Cleveland, pages 641-670.
  10. Ashcraft, Adam B., 2008. "Does the market discipline banks? New evidence from regulatory capital mix," Journal of Financial Intermediation, Elsevier, vol. 17(4), pages 543-561, October.
  11. Harvey, A C, 1976. "Estimating Regression Models with Multiplicative Heteroscedasticity," Econometrica, Econometric Society, vol. 44(3), pages 461-65, May.
  12. Beverly J. Hirtle & Kevin J. Stiroh, 2005. "The return to retail and the performance of U.S. banks," Staff Reports 233, Federal Reserve Bank of New York.
  13. Beverly Hirtle, 2007. "Public disclosure, risk, and performance at bank holding companies," Staff Reports 293, Federal Reserve Bank of New York.
  14. Lang, Mark & Lins, Karl V. & Maffett, Mark, 2009. "Transparency, Liquidity, and Valuation: International Evidence," Working Papers 09-3, University of Pennsylvania, Wharton School, Weiss Center.
  15. Joseph P. Hughes & Loretta J. Mester & Choon-Geol Moon, 2000. "Are scale economies in banking elusive or illusive? Evidence obtained by incorporating capital structure and risk-taking into models of bank production," Working Papers 00-4, Federal Reserve Bank of Philadelphia.
  16. Knaup, M. & Wagner, W.B., 2009. "A Market Based Measure of Credit Quality and Banks' Performance During the Subprime Crisis," Discussion Paper 2009-35 S, Tilburg University, Center for Economic Research.
  17. Donald Morgan & Kevin Stiroh, 2001. "Market Discipline of Banks: The Asset Test," Journal of Financial Services Research, Springer, vol. 20(2), pages 195-208, October.
  18. Mark J. Flannery & Kasturi P. Rangan, 2008. "What Caused the Bank Capital Build-up of the 1990s?," Review of Finance, European Finance Association, vol. 12(2), pages 391-429.
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Cited by:
  1. De Bruyckere, Valerie & Gerhardt, Maria & Schepens, Glenn & Vander Vennet, Rudi, 2013. "Bank/sovereign risk spillovers in the European debt crisis," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4793-4809.

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