Does Skin in the Game Help? Bank Franchise Value, Managerial Incentives and ‘Going for Broke’

30 Pages Posted: 19 Sep 2013

See all articles by Mamiza Haq

Mamiza Haq

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

Barry Williams

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

Shams Pathan

affiliation not provided to SSRN

Date Written: September 18, 2013

Abstract

The roles of bank franchise value (“skin in the game”) and CEO ownership play in determining bank risk are studied for large United States Bank Holding Companies. We find robust evidence of a U-shaped relationship between bank risk and each of CEO ownership and franchise value, indicating that increases in each are initially risk decreasing but as franchise value and CEO ownership increases so too does bank risk. Further, we find that low levels of franchise value combined with high CEO ownership results in managerial incentives aligning with those of shareholders, resulting in increased bank risk (“going for broke” or asset substitution (Harris and Raviv 1991)). We argue that these results are consistent with those of Merton (1977), but in the context of franchise value rather than bank capital, and accordingly offer some policy recommendations for regulatory monitoring of bank risk that are consistent with these results.

Keywords: Bank risk-taking, Managerial incentives, CEO ownership, Franchise value, Bank holding companies

JEL Classification: G21, G28, G30, G32, G38

Suggested Citation

Haq, Mamiza and Williams, Barry and Pathan, Shams, Does Skin in the Game Help? Bank Franchise Value, Managerial Incentives and ‘Going for Broke’ (September 18, 2013). Available at SSRN: https://ssrn.com/abstract=2327989 or http://dx.doi.org/10.2139/ssrn.2327989

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

Barry Williams (Contact Author)

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

Shams Pathan

affiliation not provided to SSRN

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