Who's Minding the Store? Motivating and Monitoring Hired Managers at Small, Closely Held Commercial Banks
Posted: 21 Sep 2000
Small closely held corporations cannot rely on market forces or outside monitors to discipline hired managers. For such firms, managerial shareholdings may be a disproportionately important tool for controlling principal-agent problems. We study a random sample of 266 small, closely held U.S. commercial banks with a broad range of ownership and management arrangements. Our results suggest that hiring an outside manager can improve a bank's profitability, but 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.
Keywords: Agency costs, commercial banks, corporate governance, profit efficiency, small business
JEL Classification: G34, G21
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