Bank monitoring, profit efficiency and the commercial lending business model

Aigbe Akhigbe and James E. McNulty

Journal of Economics and Business, 2011, vol. 63, issue 6, 551 pages

Abstract: We build a bank-specific, fixed-effects regression model to develop proxies for a bank's monitoring effort. Our results show that banks that devote more resources to monitoring (based on these proxies) are more profit efficient and the effect is large. A very important theoretical literature in finance suggests that monitoring is value enhancing; we provide empirical evidence consistent with the theory. This research thus establishes an important link between the large literature on bank monitoring and the equally large literature on profit efficiency. Monitoring is a key technology in the commercial lending business model (e.g. Mester, Nakamura, & Renault, 2007). Thus, these results point to considerable strengths in the dominant business model used in the banking industry.

Keywords: Bank relationships; Bank monitoring; Bank lending; Profit efficiency (search for similar items in EconPapers)
JEL-codes: D2 E58 E61 F33 G2 G21 G28 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jebusi:v:63:y:2011:i:6:p:531-551

DOI: 10.1016/j.jeconbus.2011.07.001

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