Who Disciplines Bank Managers?
Review of Finance, Vol. 16, pp. 197-243
62 Pages Posted: 10 Jan 2010 Last revised: 18 Jan 2012
Date Written: February 17, 2011
We exploit a unique dataset of executive turnovers in community banks to test the micro-mechanisms of discipline by examining the monitoring and influencing role of different stakeholders. We find executives are more likely to be dismissed in risky institutions. Examining the roles of shareholders, debtholders, and regulators as monitors, we obtain evidence for shareholder discipline. However, there is no evidence that risk affects dismissals more if debtholders have a larger stake in the bank or when regulators are aware of distress. When we analyze risk, losses, and profitability following turnovers, we obtain no evidence that replacing executives improves performance.
Keywords: banking, market discipline, executive turnover, financial soundness, corporate governance
JEL Classification: G21, G28
Suggested Citation: Suggested Citation