The Value of Regulators as Monitors: Evidence from Banking
73 Pages Posted: 7 Dec 2017 Last revised: 2 Jan 2020
Date Written: January 1, 2020
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: Suggested Citation