Managerial Incentives, Market Power and Bank Risk-Taking

30 Pages Posted: 15 Jan 2010 Last revised: 29 Jun 2011

Mamiza Haq

University of Queensland - Finance; Financial Research Network (FIRN)

Barry Williams

Department of Banking and Finance; Financial Research Network (FIRN)

Shams Pathan

University of Queensland - Business School; The University of Queensland

Multiple version iconThere are 2 versions of this paper

Date Written: January 15, 2010

Abstract

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.

Keywords: Bank risk-taking, Managerial incentives, Market power, CEO ownership, Charter value, Bank holding companies

JEL Classification: G21, G28, G30, G32, G38

Suggested Citation

Haq, Mamiza and Williams, Barry and Pathan, Shams, Managerial Incentives, Market Power and Bank Risk-Taking (January 15, 2010). Finance and Corporate Governance Conference 2010 Paper; Systemic Risk, Basel III, Financial Stability and Regulation 2011. Available at SSRN: https://ssrn.com/abstract=1537034 or http://dx.doi.org/10.2139/ssrn.1537034

Mamiza Haq

University of Queensland - Finance ( email )

Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Barry Williams

Department of Banking and Finance ( email )

Building H
Caulfield East, Victoria 3145
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Shams Pathan (Contact Author)

University of Queensland - Business School ( email )

The University of Queensland
Brisbane, Queensland 4072
Australia
61 7 3346 8075 (Phone)
61 7 3346 8166 (Fax)

HOME PAGE: http://www.business.uq.edu.au/staff/details/shams-pathan

The University of Queensland ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Brisbane, 4072
Australia

HOME PAGE: http://www.business.uq.edu.au/staff/staff_details?name=spathan&action=show_all

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