The Value of Regulators as Monitors: Evidence from Banking

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 intensity by the U.S. Federal Reserve. Banks subject to reduced surveillance experience a 1% loss in bank Tobin’s q and a 7% loss in equity market-to-book. These banks engage in more earnings management, and appear to compensate lower regulatory surveillance with costly internal audits. My results document a novel substitution effect between public monitoring by regulators and private monitoring by shareholders. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.03083 .

• 저널Management Science · 70(12) · 8464–8483
• 토픽Auditing, Earnings Management, Governance · Accounting
• DOI10.1287/mnsc.2021.03083
• 저자Emilio Bisetti