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

Posted: 4 May 2016

See all articles by Shams Pathan

Shams Pathan

Curtin University; Financial Research Network (FIRN)

Mamiza Haq

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

Barry Williams

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

Date Written: May 1, 2016

Abstract

The roles 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 convex relation between bank risk and each of CEO shareholding 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 result in managerial incentives aligning with those of shareholders, resulting in increased bank risk (‘going for broke’ or asset substitution). We argue that these results are consistent with those of Robert Merton, but in the context of franchise value rather than bank capital and deposit insurance, and accordingly offer some policy recommendations for regulatory monitoring of bank risk that are consistent with these results.

Keywords: Bank Holding Companies, Bank Risk-Taking, CEO Ownership, Franchise Value, Managerial Incentives

Suggested Citation

Pathan, Shams and Haq, Mamiza and Williams, Barry, Does Skin in the Game Help? Bank Franchise Value, Managerial Incentives and 'Going for Broke' (May 1, 2016). Australian Journal of Management, Vol. 41, No. 2, 2016, Available at SSRN: https://ssrn.com/abstract=2774370

Shams Pathan

Curtin University ( email )

Kent Street
Bentley
Perth, WA WA 6102
Australia

HOME PAGE: http://https://staffportal.curtin.edu.au/staff/profile/view/md-shams-tabrize-pathan-cd6b1dca/

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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

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