The Value of Regulators as Monitors: Evidence from Banking

73 Pages Posted: 7 Dec 2017 Last revised: 2 Jan 2020

See all articles by Emilio Bisetti

Emilio Bisetti

Hong Kong University of Science and Technology (HKUST)

Date Written: January 1, 2020

Abstract

While conventional wisdom suggests that regulation is costly for shareholders, agency theory predicts a positive role for regulation in reducing shareholder monitoring costs. I study this trade-off by exploiting an unexpected decrease in small-bank supervision by the Federal Reserve, and I find that reduced Fed supervision leads to a 1% loss in bank Tobin’s q and a 7% loss in equity market-to-book. These losses come from increased monitoring expenditures and managerial misreporting, and are larger when bank cash flows are volatile and opaque. My results highlight a novel substitution effect between public monitoring by regulators and private monitoring by shareholders.

Keywords: Financial Regulation, Monitoring, Shareholder Value

JEL Classification: G21, G28, G32

Suggested Citation

Bisetti, Emilio, The Value of Regulators as Monitors: Evidence from Banking (January 1, 2020). Available at SSRN: https://ssrn.com/abstract=3081537 or http://dx.doi.org/10.2139/ssrn.3081537

Emilio Bisetti (Contact Author)

Hong Kong University of Science and Technology (HKUST) ( email )

Clear Water Bay, Kowloon
Hong Kong

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
285
Abstract Views
3,121
rank
120,750
PlumX Metrics