Do stock markets discipline US Bank Holding Companies: Just monitoring, or also influencing?

Lieven Baele, Valerie De Bruyckere, Olivier De Jonghe and Rudi Vander Vennet

The North American Journal of Economics and Finance, 2014, vol. 29, issue C, 124-145

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 (semi-)volatility compared to the best performing bank(s) with similar characteristics, and a valuation signal when they are undervalued relative to the average bank with similar characteristics. We document, 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 influencing. We show that our results are unlikely to be driven by indirect influencing by regulators, subordinated debtholders, retail or wholesale depositors. Finally, we show that the likelihood that banks receive a risk and/or valuation signal increases with opaqueness, managerial discretion and specialization.

Keywords: Market discipline; Influencing; Partial adjustment; Opaqueness; Bank risk (search for similar items in EconPapers)
JEL-codes: G21 G28 L25 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: 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 In?uencing? (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:29:y:2014:i:c:p:124-145

DOI: 10.1016/j.najef.2014.05.003

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