Managerial Incentives, Market Power and Bank Risk-Taking
University of Queensland - Finance; Financial Research Network (FIRN)
Monash University - Department of Accounting
University of Queensland - Business School; The University of Queensland
January 15, 2010
Finance and Corporate Governance Conference 2010 Paper
Systemic Risk, Basel III, Financial Stability and Regulation 2011
We investigate the effect of managerial incentives and market power on bank risk-taking for a sample of 212 large US bank holding companies over 1997-2004 (i.e. 1,534 observations). Bank managers have incentives to prefer less risk while bank shareholders have preference for ‘excessive’ risk. Likewise, the market power is the centre piece of any bank regulation. However, the literature is inconclusive as to the effect of managerial incentives and market power on bank risk-taking. Our results reveal a U-shape relation between bank risk and CEO ownership (proxy for managerial incentives) and between bank risk and charter value (proxy for market power). Particularly, we find that bank risk initially decreases and then increases with both CEO ownership and charter value. These convex relations are robust to various bank risk proxies, different estimation approaches to account for endogeneity and several bank specific control variables.
Number of Pages in PDF File: 30
Keywords: Bank risk-taking, Managerial incentives, Market power, CEO ownership, Charter value, Bank holding companies
JEL Classification: G21, G28, G30, G32, G38
Date posted: January 15, 2010 ; Last revised: June 29, 2011
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