Banks’ Risk Endogenous to Strategic Management Choices

20 Pages Posted: 19 Oct 2015

See all articles by Manthos D. Delis

Manthos D. Delis

Montpellier Business School

Iftekhar Hasan

Fordham University - Gabelli School of Business; Bank of Finland

Efthymios G. Tsionas

Lancaster University

Date Written: October 2015

Abstract

Use of variability of profits and other accounting‐based ratios in order to estimate a firm's risk of insolvency is a well‐established concept in management and economics. We argue that these measures fail to approximate the true level of risk accurately because managers consider other strategic choices and goals when making risky decisions. Instead, we propose an econometric model that incorporates current and past strategic choices to estimate risk from the profit function. Specifically, we extend the well‐established multiplicative error model to allow for the endogeneity of the uncertainty component. We demonstrate the power of the model using a large sample of US banks and show that our estimates predict the accelerated bank risk that led to the subprime crisis in 2007. Our measure of risk also predicts the probability of bank default both in the period of the default but also well in advance of this default and before conventional measures of bank risk.

Suggested Citation

Delis, Manthos D. and Hasan, Iftekhar and Tsionas, Efthymios G., Banks’ Risk Endogenous to Strategic Management Choices (October 2015). British Journal of Management, Vol. 26, Issue 4, pp. 637-656, 2015. Available at SSRN: https://ssrn.com/abstract=2675645 or http://dx.doi.org/10.1111/1467-8551.12111

Manthos D. Delis (Contact Author)

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, 34080
France

Iftekhar Hasan

Fordham University - Gabelli School of Business ( email )

Rose Hill Campus Bronx
New York, NY 10458
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Efthymios G. Tsionas

Lancaster University ( email )

Lancaster LA1 4YX
United Kingdom

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