Chapter

Market Discipline in the Governance of U.S. Bank Holding Companies

Robert R. Bliss and Mark J. Flannery

in Prudential Supervision

Published by University of Chicago Press

Published in print January 2002 | ISBN: 9780226531885
Published online February 2013 | e-ISBN: 9780226531939 | DOI: http://dx.doi.org/10.7208/chicago/9780226531939.003.0004
Market Discipline in the Governance of U.S. Bank Holding Companies

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This chapter seeks to complement the existing literature on market monitoring by looking for direct evidence of stockholder and bondholder influence in the U.S. banking sector. Because financial regulators are actively considering the formal use of market discipline in their supervisory processes, an empirical investigation of market influence on bank holding companies (BHCs) is quite timely. The chapter is organized as follows: Section 4.2 discusses agency problems pertaining to complex U.S. BHCs that generate the need for disciplinary forces. Section 4.3 discusses the construction of the study's data set. Section 4.4 presents evidence on the extent to which bondholders and shareholders have common—as opposed to conflicting—goals in disciplining firm managers. Section 4.5 describes and motivates our tests for market influence, and the results of those tests are presented in Section 4.6. Finally, Section 4.7 discusses the regulatory implications of the findings. A commentary and discussion summary are also included at the end of the chapter.

Keywords: bank regulation; stockholders; bondholders; banking sector; market influence; bank holding companies

Chapter.  14724 words.  Illustrated.

Subjects: Financial Markets

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