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Alternative methods of corporate control in commercial banks

  • Stephen D. Prowse
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    In this article, Stephen Prowse investigates how owners of commercial banks encourage management to follow value-maximizing policies. While the "corporate control mechanism" in nonfinancial firms is well documented, for the banking industry much less evidence is available. Moreover, unique factors in the operating environment of commercial banks may mean that their corporate control mechanism operates differently from that of nonfinancial firms. ; Prowse analyzes a sample of bank holding companies (BHCs) from 1987 to 1992 to determine how many underwent a change in corporate control by hostile takeover, friendly merger, action by the board of directors, or intervention by regulators. Prowse finds that the primary market-based corporate control mechanism among BHCs is action by the board, although bank boards appear to be much less assertive than boards of nonfinancial firms. Overall, the market-based corporate control mechanisms in banks do not appear as efficient at disciplining managers as they are in other firms. By default, this has given a primary role to regulators to provide a "last resort" control mechanism. Prowse analyzes reasons for this and evaluates how proposed banking legislation might affect corporate governance.

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    File URL: http://www.dallasfed.org/assets/documents/research/er/1995/er9503c.pdf
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    Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

    Volume (Year): (1995)
    Issue (Month): Q III ()
    Pages: 24-36

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    Handle: RePEc:fip:fedder:y:1995:i:qiii:p:24-36
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    1. Mark E. Levonian, 1995. "Why banking isn't declining," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jan20.
    2. Douglas McManus & Richard Rosen, 1991. "Risk and capitalization in banking," Proceedings 322, Federal Reserve Bank of Chicago.
    3. Bert Ely, 1992. "Commercial banks are not obsolete and the Federal Government should stop trying to make them so," Proceedings 364, Federal Reserve Bank of Chicago.
    4. Gary Gorton & Richard Rosen, 1992. "Corporate Control, Portfolio Choice, and the Decline of Banking," NBER Working Papers 4247, National Bureau of Economic Research, Inc.
    5. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-64, April.
    6. George G. Kaufman & Larry R. Mote, 1994. "Is banking a declining industry? A historical perspective," Economic Perspectives, Federal Reserve Bank of Chicago, issue May, pages 2-21.
    7. Baradwaj, Babu G. & Fraser, Donald R. & Furtado, Eugene P. H., 1990. "Hostile bank takeover offers : Analysis and implications," Journal of Banking & Finance, Elsevier, vol. 14(6), pages 1229-1242, December.
    8. Morck, Randall & Shleifer, Andrei & Vishny, Robert W, 1989. "Alternative Mechanisms for Corporate Control," American Economic Review, American Economic Association, vol. 79(4), pages 842-52, September.
    9. John H. Boyd & Mark Gertler, 1994. "Are banks dead? or, are the reports greatly exaggerated?," Proceedings 25, Federal Reserve Bank of Chicago.
    10. Brickley, James A & James, Christopher M, 1987. "The Takeover Market, Corporate Board Composition, and Ownership Structure: The Case of Banking," Journal of Law and Economics, University of Chicago Press, vol. 30(1), pages 161-80, April.
    11. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
    12. Benjamin E. Hermalin & Michael S. Weisbach, 1988. "The Determinants of Board Composition," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 589-606, Winter.
    13. James, Christopher, 1984. "An Analysis of the Effect of State Acquisition Laws on Managerial Efficiency: The Case of the Bank Holding Company Acquisitions," Journal of Law and Economics, University of Chicago Press, vol. 27(1), pages 211-26, April.
    14. Timothy H. Hannan & Ferdinand Mavinga, 1980. "Expense Preference and Managerial Control: the Case of the Banking Firm," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 671-682, Autumn.
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