Bliss and Flannery.

• Position: Brief Article

Bliss and Flannery note that effective market discipline involves two distinct components: the ability of security holders to accurately assess the condition of a firm (monitoring) and the ability to have their assessments reflected in subsequent actions by management (influence). There is substantial evidence for the existence of market monitoring, but little existing evidence on market influence. Bliss and Flannery find that security price changes have no influence on subsequent managerial actions. The statistical linkages between security returns and subsequent management actions are consistent with monitoring, but not influence. They conclude that, for the moment, market discipline per se remains a matter of faith and not evidence.

In the early 1990s, after decades of high inflation and financial repression, Argentina embarked on a course of macroeconomic and bank regulatory reform. Bank regulatory policy promoted privatization, financial liberalization, free entry, and limited safety net support, and it established a novel mix of regulatory and market discipline to ensure stable growth of the banking system during the liberalization process. Argentina suffered some fallout from the Mexican tequila crisis of 1995, but its response to that crisis (allowing weak banks to close) and the redoubling of regulatory efforts to promote market discipline after the crisis made Argentina's banking system quite resilient during the Asian, Russian, and Brazilian crises...