Managerial Incentives, Market Power and Bank Risk-Taking
Finance and Corporate Governance Conference 2010 Paper
Systemic Risk, Basel III, Financial Stability and Regulation 2011
30 Pages Posted: 15 Jan 2010 Last revised: 29 Jun 2011
There are 2 versions of this paper
Managerial Incentives, Market Power and Bank Risk-Taking
Managerial Incentives, Market Power, and Bank Risk-Taking
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: Suggested Citation
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