Who's Minding the Store? Motivating and Monitoring Hired Managers at Small, Closely Held Firms: The Case of Commercial Banks
We test whether the gains from hiring an outside manager exceed the principal-agent costs of ownermanager
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.
