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Federal Reserve Bank of Chicago
Working Paper Series
Who's minding the store? motivating and monitoring hired managers at small, closely held firms: the case of commercial banks
Robert DeYoung
Kenneth Spong
Richard J. Sullivan
Abstract

We test whether the gains from hiring an outside manager exceed the principal-agent costs of owner-manager separation at 266 small, closely held U.S. commercial banks. Our results suggest that hiring an outside manager can improve a bank's profit efficiency, but that these gains depend on aligning the hired managers with owners via managerial shareholdings. We find that over-utilizing this control mechanism results in entrenchment, while under-utilization is costly in terms of foregone profits. This study provides a relatively unfettered test of mitigating principal-agent costs, because these small banks cannot rely on market forces or blocks of outside investors to monitor managers.


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Robert DeYoung & Kenneth Spong & Richard J. Sullivan, Who's minding the store? motivating and monitoring hired managers at small, closely held firms: the case of commercial banks, Federal Reserve Bank of Chicago, Working Paper Series WP-99-17, 1999.
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Keywords: Small business ; Banks and banking - Costs ; Bank management
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