Alternative methods of corporate control in commercial banks
In this article, Stephen Prowse investigates how owners of commercial banks encourage management to follow value-maximizing policies. While the "corporate control mechanism" in nonfinancial firms is well documented, for the banking industry much less evidence is available. Moreover, unique factors in the operating environment of commercial banks may mean that their corporate control mechanism operates differently from that of nonfinancial firms. ; Prowse analyzes a sample of bank holding companies (BHCs) from 1987 to 1992 to determine how many underwent a change in corporate control by hostile takeover, friendly merger, action by the board of directors, or intervention by regulators. Prowse finds that the primary market-based corporate control mechanism among BHCs is action by the board, although bank boards appear to be much less assertive than boards of nonfinancial firms. Overall, the market-based corporate control mechanisms in banks do not appear as efficient at disciplining managers as they are in other firms. By default, this has given a primary role to regulators to provide a "last resort" control mechanism. Prowse analyzes reasons for this and evaluates how proposed banking legislation might affect corporate governance.