Who Disciplines Bank Managers? by Martin Čihák; Andrea Maechler; Klaus Schaeck; Stéphanie Stolz

Author:Martin Čihák; Andrea Maechler; Klaus Schaeck; Stéphanie Stolz
Language: eng
Format: epub
Publisher: International Monetary Fund
Published: 2009-08-15T00:00:00+00:00

Table 4. Key Variables of Interest by Percentile of Z-Score

We report t-tests for differences in means and medians for Z-Scores, ROE, relative Profits, and losses for the turnover banks for one, two and three years following the turnover. Absolute values of test statistics are presented. ***p < 0.01, **p < 0.05, *p < 0.1.

We conduct a wide range of robustness checks, based on alternative definitions of bank executives, estimation methods, subsamples and matched sample sizes in Appendix IV. These tests leave our key findings virtually unchanged.

Bank performance following executive turnovers

Thus far, we investigated the nexus between risk and the probability of turnovers, and found some evidence for the presence of the first dimension of discipline in that sense that proxies for monitoring by shareholders and debtholders are significantly associated with turnovers.

In this section, we go one step further and use three alternative ways to investigate if the second dimension of market discipline whether the decision to remove a poorly performing executive influences risk-taking behavior. To do this, we examine whether a bank’s performance improves after a forced turnover. If the new face of discipline is effective, we expect that performance improves following forced departures.25 In a first step, we focus on descriptive statistics in the periods following forced turnovers in the banks that had executives removed. In a second step, we compare descriptive statistics between the banks from the turnover and control groups, and, in a third step, we use a matching procedure based on propensity scores (Dehejia and Wahba, 2002) to address sample selection problems.

Under the first approach, we examine the extent to which the means and medians of the key variables (Z-Scores, ROE, relative profits, and losses) differ between the period of the forced turnover and one, two and three years afterwards in Table 5. This analysis indicates that significant improvements in terms of average Z-Scores can only be observed in the third year following a turnover, whereas no significant changes can be observed in terms of absolute ROE. The relative ROE improves significantly during the three years following turnovers, and we also find that the turnover banks significantly reduce losses following forced turnovers. Thus, there is some evidence that performance, but not risk, improves in banks that had their executive fired. These results are consistent with previous studies that report that executive turnovers affect firm operations (Clayton, Hartzell, and Rosenberg, 2005).

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