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

  • Robert DeYoung
  • Kenneth Spong
  • Richard J. Sullivan

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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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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