Managerial Incentives, Market Power, and Bank Risk-Taking
33 Pages Posted: 31 Jul 2011
Date Written: July 29, 2011
We investigate the effects of managerial incentives and market power on bank risk-taking for a sample of 212 large U.S. bank holding companies over the period 1997-2004 (comprising 1,534 observations). Bank managers have incentives to prefer less risk, while bank shareholders prefer higher risk, and market power is the centerpiece of any bank regulation. However, the literature is inconclusive regarding the effects of managerial incentives and market power on bank risk-taking. Our results reveal a U-shaped relationship between bank risk-taking and CEO ownership (a proxy for managerial incentives) and between bank risk-taking and charter value (a proxy for market power). Particularly, we find that bank risk-taking initially decreases and then increases with both CEO ownership and charter value. These convex relations are robust for various bank risk-taking 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
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