Kristin Wilson, Strategy DBA
Dissertation Chair: Felix Oberholzer-Gee
Essays on Regulatory Oversight: Evidence from the US Banking Industry
Overview
My dissertation research explores on the strategic implications of firms' ongoing engagement with their regulators. We often think of firms' policy environment as composed of the "rules of the game" as fashioned by government policy-makers. Firms' actions to influence these rules through lobbying, negotiation and political contributions have been the basis for much of the prior research on firms' non-market strategy. Yet, industry rules is often interpreted by regulatory agents who are given broad authority under which to enforce their mandate. How should firms approach their interactions with these agents? Prior literature on government relationships has tended to emphasize the potential for unproductive rent-seeking on behalf of both firms and regulators. This approach oversimplifies the nature of exchange. The potential for firms to build regulatory relationships that minimize uncertainty and facilitate knowledge transfer suggests that these relationships can create value and differentiate firms from their competitors. The essays in my dissertation address the ambiguous value of regulatory engagement through careful empirical study of regulatory supervision in the US banking industry.
Dissertation projects
My dissertation will be composed of three papers. I will be presenting the first paper, "The Performance Effects of Regulatory Oversight" (co-authored with economics student Stan Veuger) at this year's Academy of Management meetings. In this paper, we measure the net impact of firms' relationship with regulators on firms' overall financial performance. We use data on the performance of U.S. commercial banks to show that banks located physically closer to their supervisors' field offices accrue significant performance differentials driven by lower administrative costs: two-hour difference in examiner travel time corresponds to an increase in expense levels of 1 to 2 percent of capital that are not explained by leverage. Greater supervisor distance is not associated with either higher interest margins or non-performing loans, which implies that closely supervised banks enjoy higher risk-adjusted returns. Our identification strategy relies on the banking industry's overlapping regulatory jurisdictions to disentangle the confounding geographic factors from the effect of supervision. We hypothesize that co-located firms' advantages accrue due to their banks' lower costs of information exchange, particularly the exchange of soft information and knowledge of the regulatory framework. In support of this conjecture, we find that small banks benefit disproportionately from proximity to their supervisor. The effect is not reduced over time, implying that relationships, rather than the cost of actual physical information transmission, drives the effect. Lastly, we find that the financial crisis triggered a more aggressive regulatory stance that eliminated the benefits from proximity completely. This paper contributes to a gap in the empirical literature on firms' government relationships-while the sociology literature has postulated that bureaucrats with significant discretion can lower costs, there has been no large-sample statistical evidence. Meanwhile, the economics literature has found only broad evidence for the opposite, principally in developing economies.
The second and third papers of my dissertation examine other aspects of regulatory oversight in the banking industry. While the paper above compares the financial performance of similarly positioned banks, my second paper explores the possibility that frictions in communicating soft information with regulators changes a firms' business mix and competitive position in the marketplace. Preliminary results suggest that, contrary to my prior, more distant banks are given greater leeway to invest in risky business opportunities and have a higher market share than their more closely supervised competitors. My third paper examines the effect of public investments in the quality of the regulatory infrastructure on industry structure and intra-state competitiveness using a unique panel of state-level agency characteristics. Stronger state regulatory agencies, characterized by more higher paid exam forces with greater tenure, generate higher performance differentials in state banks relative to national banks located in the same geographic regions. (Results for both these studies are preliminary and subject to change.)
