Are regulatory management evaluations informative about bank accounting returns and risk?

This paper considers the association between regulatory management evaluations and bank accounting returns and risk. For robustness, we estimate our tests using a matched sample with equal numbers of banks with and without weak regulatory management evaluations. We document a strong association between weak ex-ante regulatory assessments of management and poor accounting returns not explained by other financial or regulatory indicators. We do not find robust evidence that weak management evaluations are linked with risk. Our results suggest that regulatory assessments of bank management are informative and that better managed banks perform better without necessarily taking on greater risk.

► Considers relation between regulatory assessments of bank management quality and accounting returns/risk. ► Exploits a unique measure of management competence derived from supervisory bank examinations. ► Uses propensity score matching techniques to adjust for possible sample selection bias. ► Shows ex-ante measures of management quality are related to better performance proxied by accounting returns.