Do stock markets discipline US bank holding companies

Just monitoring, or also influencing?

L.T.M. Baele, V. De Bruyckere, O.G. De Jonghe, R. Vander Vennet

Research output: Contribution to journalArticleScientificpeer-review

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Abstract

This paper presents evidence that bank managers adjust key strategic variables following a risk and/or valuation signal from the stock market. Banks receive a risk signal when they exhibit substantially higher (semi-)volatility compared to the best performing bank(s) with similar characteristics, and a valuation signal when they are undervalued relative to the average bank with similar characteristics. We document, using a partial adjustment model, that bank managers adjust the long-term target value of key strategic variables and the speed of adjustment towards those targets following a risk and/or negative valuation signal. We interpret this as evidence of stock market influencing. We show that our results are unlikely to be driven by indirect influencing by regulators, subordinated debtholders, retail or wholesale depositors. Finally, we show that the likelihood that banks receive a risk and/or valuation signal increases with opaqueness, managerial discretion and specialization.
Original languageEnglish
Pages (from-to)124-145
JournalNorth American Journal of Economics and Finance
Volume29
DOIs
Publication statusPublished - Jul 2014

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Market discipline
Bank holding companies
Monitoring
Stock market
Managers
Managerial discretion
Retail
Speed of adjustment
Partial adjustment model

Keywords

  • Market discipline
  • Influencing
  • Partial adjustment
  • Opaqueness
  • Bank risk

Cite this

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title = "Do stock markets discipline US bank holding companies: Just monitoring, or also influencing?",
abstract = "This paper presents evidence that bank managers adjust key strategic variables following a risk and/or valuation signal from the stock market. Banks receive a risk signal when they exhibit substantially higher (semi-)volatility compared to the best performing bank(s) with similar characteristics, and a valuation signal when they are undervalued relative to the average bank with similar characteristics. We document, using a partial adjustment model, that bank managers adjust the long-term target value of key strategic variables and the speed of adjustment towards those targets following a risk and/or negative valuation signal. We interpret this as evidence of stock market influencing. We show that our results are unlikely to be driven by indirect influencing by regulators, subordinated debtholders, retail or wholesale depositors. Finally, we show that the likelihood that banks receive a risk and/or valuation signal increases with opaqueness, managerial discretion and specialization.",
keywords = "Market discipline, Influencing, Partial adjustment, Opaqueness, Bank risk",
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journal = "North American Journal of Economics and Finance",
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Do stock markets discipline US bank holding companies : Just monitoring, or also influencing? / Baele, L.T.M.; De Bruyckere, V.; De Jonghe, O.G.; Vander Vennet, R.

In: North American Journal of Economics and Finance, Vol. 29, 07.2014, p. 124-145.

Research output: Contribution to journalArticleScientificpeer-review

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T2 - Just monitoring, or also influencing?

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AU - Vander Vennet, R.

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AB - This paper presents evidence that bank managers adjust key strategic variables following a risk and/or valuation signal from the stock market. Banks receive a risk signal when they exhibit substantially higher (semi-)volatility compared to the best performing bank(s) with similar characteristics, and a valuation signal when they are undervalued relative to the average bank with similar characteristics. We document, using a partial adjustment model, that bank managers adjust the long-term target value of key strategic variables and the speed of adjustment towards those targets following a risk and/or negative valuation signal. We interpret this as evidence of stock market influencing. We show that our results are unlikely to be driven by indirect influencing by regulators, subordinated debtholders, retail or wholesale depositors. Finally, we show that the likelihood that banks receive a risk and/or valuation signal increases with opaqueness, managerial discretion and specialization.

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