Size, Leverage, and Risk-Taking of Financial Institutions
56 Pages Posted: 2 Aug 2012 Last revised: 24 Apr 2018
Date Written: August 2, 2012
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
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