Market Discipline in the Governance of U.S. Bank Holding Companies: Monitoring vs. Influencing

41 Pages Posted: 6 Jul 2001

See all articles by Robert R. Bliss

Robert R. Bliss

Wake Forest University - Schools of Business

Mark J. Flannery

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: March 21, 2001

Abstract

Market discipline is an article of faith among financial economists, and the use of market discipline as a regulatory tool is gaining credibility. Effective market discipline involves two distinct components: security holders' ability to accurately assess the condition of a firm (monitoring) and their ability to cause subsequent managerial actions to reflect those assessments (influence). Substantial evidence supports the existence of market monitoring. However, the existing evidence about market influence involves relatively rare events such as management turnover. This paper seeks evidence that U.S. bank holding companies' security price changes reliably influence subsequent managerial actions. Although we identify some patterns consistent with beneficial market influences, our methodology does not provide strong evidence that stock or (especially) bond investors regularly influence managerial actions. Day-to-day market influence remains, for the moment, more a matter of faith than of empirical evidence.

Suggested Citation

Bliss, Robert R. and Flannery, Mark Jeffrey, Market Discipline in the Governance of U.S. Bank Holding Companies: Monitoring vs. Influencing (March 21, 2001). EFA 2001 Barcelona Meetings; FRB Chicago Working Paper No. 2000-03. Available at SSRN: https://ssrn.com/abstract=275847 or http://dx.doi.org/10.2139/ssrn.275847

Robert R. Bliss (Contact Author)

Wake Forest University - Schools of Business ( email )

P.O. Box 7659
Winston-Salem, NC 27109-7285
United States

Mark Jeffrey Flannery

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-3184 (Phone)
352-392-0103 (Fax)

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