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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.
Baele,L.T.M.
De Bruyckere,V.
De Jonghe,O.G.
Vander Vennet,R.
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.
Description
Date
2014-07
Journal Title
Journal ISSN
Volume Title
Publisher
Research Projects
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Journal Issue
Keywords
Market discipline, Influencing, Partial adjustment, Opaqueness, Bank risk, SDG 10 - Reduced Inequalities
Citation
Baele, L T M, De Bruyckere, V, De Jonghe, O G & Vander Vennet, R 2014, 'Do stock markets discipline US bank holding companies : Just monitoring, or also influencing?', North American Journal of Economics and Finance, vol. 29, pp. 124-145. https://doi.org/10.1016/j.najef.2014.05.003