Do stock markets discipline US Bank Holding Companies: Just monitoring, or also influencing?

•The main contribution is a new test for direct market influencing of banks.•We use bank-specific, stock market-based risk and valuation.•Bank managers adjust key strategic variables following signals.•They adjust the long-term target value of the strategic variable.•Sometimes, the speed of adjustment towards the long-term also changes.

This paper presents evidence that bank managers adjust key strategic variables following a risk and/or valuation signal from the stock market. Banks receive a risk signal when they exhibit substantially higher (semi-)volatility compared to the best performing bank(s) with similar characteristics, and a valuation signal when they are undervalued relative to the average bank with similar characteristics. We document, using a partial adjustment model, that bank managers adjust the long-term target value of key strategic variables and the speed of adjustment towards those targets following a risk and/or negative valuation signal. We interpret this as evidence of stock market influencing. We show that our results are unlikely to be driven by indirect influencing by regulators, subordinated debtholders, retail or wholesale depositors. Finally, we show that the likelihood that banks receive a risk and/or valuation signal increases with opaqueness, managerial discretion and specialization.