The Value of Regulators as Monitors: Evidence from Banking

Emilio Bisetti ()
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Emilio Bisetti: Department of Finance, School of Business and Management, Hong Kong University of Science and Technology (HKUST), Clear Water Bay, Hong Kong SAR

Management Science, 2024, vol. 70, issue 12, 8464-8483

Abstract: While conventional wisdom suggests that financial supervision is costly for bank shareholders, agency theory suggests that supervisors’ audits can reduce shareholder monitoring costs. I study this trade-off in the context of an unexpected decrease in off-site surveillance intensity by the U.S. Federal Reserve. Banks subject to reduced surveillance experience a 1% loss in bank Tobin’s q and a 7% loss in equity market-to-book. These banks engage in more earnings management, and appear to compensate lower regulatory surveillance with costly internal audits. My results document a novel substitution effect between public monitoring by regulators and private monitoring by shareholders.

Keywords: financial supervision; off-site surveillance; bank value (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:12:p:8464-8483

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