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S&L performance persistence, moral hazard and market discipline

A. Sinan Cebenoyan (Department of Finance, Frank G. Zarb School of Business, Hofstra University, Hempstead, N.Y. 11549)
Elizabeth S. Cooperman (University of Colorado at Denver, College of Business, Campus Box 165, P.O. Box 173364, Denver, Colorado 80217‐3364)
Charles A. Register (Florida Atlantic University, Department of Economics, College of Business, 777 Glades Road, Boca Raton, Florida 33431‐0991)

Managerial Finance

ISSN: 0307-4358

Article publication date: 1 September 2004

Abstract

While prior research finds evidence of significant performance persistence in banking, the issue of the determinants of such persistence has rarely been examined. In light of a liberalized thrift takeover market, this study tests for persistence and then attempts to identify its determinants for U.S. thrifts operating during 1989 to 1994. A moral hazard hypothesis for losing persistence is examined, as well as the effectiveness of the takeover market in disciplining persistent losers. Results indicate significant performance persistence, with firms in the sample 16 times more likely to remain in an initial position as a winner, or loser, than to switch. Consistent with moral hazard, persistent losers exhibit low charter values and greater risk‐taking behavior, with the opposite relations for persistent winners. Finally, and perhaps most importantly, persistent losers generally had a significantly higher probability of subsequent takeover, indicating the effectiveness of the takeover market in disciplining poor performers.

Keywords

Citation

Sinan Cebenoyan, A., Cooperman, E.S. and Register, C.A. (2004), "S&L performance persistence, moral hazard and market discipline", Managerial Finance, Vol. 30 No. 9, pp. 56-69. https://doi.org/10.1108/03074350410769272

Publisher

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Emerald Group Publishing Limited

Copyright © 2004, Emerald Group Publishing Limited