Who's minding the store? Motivating and monitoring hired managers at small, closely held commercial banks

Small, closely held corporations must rely disproportionately on managerial shareholdings to mitigate the agency costs associated with hired managers, because market discipline and motivated outside monitors are typically absent for such firms. We study a random sample of 266 small, closely held US commercial banks with a broad range of ownership and management arrangements. Our results suggest that hiring an outside manager can improve profitability, but these gains depend on aligning 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.