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Managerial Incentives, Market Power, and Bank Risk-Taking

33 Pages Posted: 31 Jul 2011  

Mamiza Haq

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

Shams Pathan

The University of Queensland; The University of Queensland; Financial Research Network (FIRN)

Barry Williams

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

Multiple version iconThere are 2 versions of this paper

Date Written: July 29, 2011

Abstract

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

Suggested Citation

Haq, Mamiza and Pathan, Shams and Williams, Barry, Managerial Incentives, Market Power, and Bank Risk-Taking (July 29, 2011). Available at SSRN: https://ssrn.com/abstract=1898933 or http://dx.doi.org/10.2139/ssrn.1898933

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

Shams Pathan (Contact Author)

The University of Queensland ( email )

United States

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

Financial Research Network (FIRN) ( 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

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

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