The Value of Regulators as Monitors: Evidence from Banking

71 Pages Posted: 7 Dec 2017 Last revised: 11 Dec 2020

See all articles by Emilio Bisetti

Emilio Bisetti

Hong Kong University of Science and Technology (HKUST)

Date Written: December 11, 2020

Abstract

While conventional wisdom suggests that financial supervision is costly for bank shareholders,
agency theory suggests that supervisors’ audits can reduce shareholder monitoring
costs. I study this trade-off in the context of an unexpected decrease in off-site surveillance by
the US Federal Reserve, and I find that reduced surveillance leads to a 1% loss in bank Tobin’s
q and a 7% loss in equity market-to-book. These losses come from increased internal audit expenditures
and managerial misreporting, and they are larger in banks with opaque cash flows.
My results document 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 (December 11, 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

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