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The Value of Regulators as Monitors: Evidence from Banking

Author

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  • Emilio Bisetti

    (Department of Finance, School of Business and Management, Hong Kong University of Science and Technology (HKUST), Clear Water Bay, Hong Kong SAR)

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 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.

Suggested Citation

  • Emilio Bisetti, 2024. "The Value of Regulators as Monitors: Evidence from Banking," Management Science, INFORMS, vol. 70(12), pages 8464-8483, December.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:12:p:8464-8483
    DOI: 10.1287/mnsc.2021.03083
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