Size, Leverage, and Risk-Taking of Financial Institutions

56 Pages Posted: 2 Aug 2012 Last revised: 24 Apr 2018

See all articles by Sanjai Bhagat

Sanjai Bhagat

University of Colorado at Boulder - Department of Finance

Brian J. Bolton

IMD Business School, Global Board Center

Jun Lu

Central University of Finance and Economics (CUFE)

Date Written: August 2, 2012

Abstract

We investigate the link between firm size and risk-taking among financial institutions during the period of 1998-2008 and make three contributions. First, size is positively correlated with risk-taking measures even when controlling for other observable firm characteristics. This is consistent with the notion that “too-big-to-fail” policies distort the risk incentives of financial institutions. Second, a simple decomposition of the primary risk measure, the Z-score, reveals that financial firms engage in excessive risk-taking mainly through increased leverage. Third, we find that bank corporate governance measured as the median director dollar stockholding has a substantial impact on reducing firms’ risk-taking.

Keywords: Bank governance, Bank size, Bank capital requirement, Corporate governance

JEL Classification: G20, G21, G32, G34

Suggested Citation

Bhagat, Sanjai and Bolton, Brian J. and Lu, Jun, Size, Leverage, and Risk-Taking of Financial Institutions (August 2, 2012). Journal of Banking and Finance, Vol. 59, 2015. Available at SSRN: https://ssrn.com/abstract=2122727 or http://dx.doi.org/10.2139/ssrn.2122727

Sanjai Bhagat (Contact Author)

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States
303-492-7821 (Phone)

Brian J. Bolton

IMD Business School, Global Board Center ( email )

Ch. de Bellerive 23
P.O. Box 915
CH-1001 Lausanne
Switzerland
+41216180225 (Phone)

Jun Lu

Central University of Finance and Economics (CUFE) ( email )

Beijing, Beijing
China

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