S&L performance persistence, moral hazard and market discipline

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.

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