Market discipline is an article of faith among financial economists, and the use of market
discipline as a regulatory tool is gaining credibility. Effective market discipline involves two
distinct components: security holders’ ability to accurately assess the condition of a firm
(“monitoring”) and their ability to cause subsequent managerial actions to reflect those
assessments (“influence”). Substantial evidence supports the existence of market monitoring.
However, little evidence exists on market influence, and then only for stockholders and for rare
events such as management turnover. This paper seeks evidence that U.S. bank holding
companies’ security price changes reliably influence subsequent managerial actions. Although we
identify some patterns consistent with beneficial market influences, we have not found strong
evidence that stock or (especially) bond investors regularly influence managerial actions. Market
influence remains, for the moment, more a matter of faith than of empirical evidence.