Tag Archives: Monitoring

Jonathan McMillan’s “The End of Banking”

Jonathan McMillan proposes a systemic solvency rule which stipulates that

[t]he value of the real assets of a company has to be greater than or equal to the value of the company’s liabilities in the worst financial state. (p. 147)

That is, the financial assets of a company have to be financed by equity. This reminds of Kotlikoff’s limited purpose banking, see here and here. McMillan (who is actually two persons, a banker and a journalist) argues that Kotlikoff’s proposal

is a step in the right direction to address the boundary problem, [but] it creates an overwhelming public authority [that monopolizes monitoring]. Moreover, it does not solve the boundary problem. Limited purpose banking requires the regulator to differentiate between financial and nonfinancial companies. … Finding clear legal criteria to categorize a company as financial is impossible. (p. 140)

It Pays to Have Academic Economists on the Board

In a Bank of Finland discussion paper, Bill Francis, Iftekhar Hasan and Qiang Wu argue that there is evidence for academic economists to be useful after all. Academics on the board of directors “are valuable advisors and effective monitors.” The authors write in the abstract:

Directors from academia served on the boards of around 40% of S&P 1,500 firms over the 1998-2011 period. … We find that companies with directors from academia are associated with higher performance and this relation is driven by professors without administrative jobs. We also find that academic directors play an important governance role through their advising and monitoring functions. Specifically, our results show that the presence of academic directors is associated with higher acquisition performance, higher number of patents and citations, higher stock price informativeness, lower discretionary accruals, lower CEO compensation, and higher CEO forced turnover-performance sensitivity. Overall, our results provide supportive evidence that academic directors are valuable advisors and effective monitors and that, in general, firms benefit from having academic directors.