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

L. Baele, V. de Bruyckere, Olivier De Jonghe and Rudi Vander Vennet

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

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.

Keywords: monitoring; in?uencing; stochastic frontier; multiplicative heteroscedasticity regression; partial adjustment; opaqueness; earnings forecast dispersion; bank risk (search for similar items in EconPapers)
JEL-codes: G21 G28 L25 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2012-12
New Economics Papers: this item is included in nep-ban and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Do stock markets discipline US Bank Holding Companies: Just monitoring, or also influencing? (2014)
Working Paper: Do stock markets discipline US bank holding companies: Just monitoring, or also influencing? (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:12/827

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