Who's Minding the Store? Motivating and Monitoring Hired Managers at Small, Closely Held Firms: The Case of Commercial Banks

41 Pages Posted: 11 Feb 2000

See all articles by Robert DeYoung

Robert DeYoung

University of Kansas School of Business

Kenneth Spong

Federal Reserve Bank of Kansas City

Richard J. Sullivan

Federal Reserve Bank of Kansas City

Date Written: March 21, 2001

Abstract

We test whether the gains from hiring an outside manager exceed the principal-agent costs of owner-manager separation at 266 small, closely held U.S. commercial banks. Our results suggest that hiring an outside manager can improve a bank's profit efficiency, but that these gains depend on aligning the hired managers with owners via managerial shareholdings. We find that over-utilizing this control mechanism results in entrenchment, while under-utilization is costly in terms of foregone profits. This study provides a relatively unfettered test of mitigating principal-agent costs, because these small banks cannot rely on market forces or blocks of outside investors to monitor managers.

JEL Classification: G21, G34

Suggested Citation

DeYoung, Robert and Spong, Kenneth and Sullivan, Richard J., Who's Minding the Store? Motivating and Monitoring Hired Managers at Small, Closely Held Firms: The Case of Commercial Banks (March 21, 2001). FRB Chicago Working Paper No. 1999-17. Available at SSRN: https://ssrn.com/abstract=205648 or http://dx.doi.org/10.2139/ssrn.205648

Robert DeYoung (Contact Author)

University of Kansas School of Business ( email )

Capitol Federal Hall
1654 Naismith Drive
Lawrence, KS 66045
United States
785-864-1806 (Phone)

Kenneth Spong

Federal Reserve Bank of Kansas City ( email )

Division of Bank Supervision and Structure
Kansas City, MO 64198
United States
816-881-2878 (Phone)

Richard J. Sullivan

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States
(816) 881-2372 (Phone)

HOME PAGE: http://kansascityfed.org/home/subwebnav.cfm?level=3&theID=10970&SubWeb=10782

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