Who's Minding the Store? Motivating and Monitoring Hired Managers at Small, Closely Held Commercial Banks

Posted: 21 Sep 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

Abstract

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

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 Commercial Banks. Journal of Banking and Finance. Available at SSRN: https://ssrn.com/abstract=236830

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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