Do Social Networks Encourage Risk-Taking? Evidence from Bank CEOs

37 Pages Posted: 16 Nov 2016  

Yiwei Fang

Illinois Institute of Technology

Iftekhar Hasan

Fordham University - Gabelli School of Business; Bank of Finland

Liuling Liu

Bowling Green State University - College of Business Administration

Haizhi Wang

Illinois Institute of Technology - Stuart School of Business

Date Written: November 2016

Abstract

This paper studies how CEO social networks affect bank risk-taking. Using a sample of 481 publicly traded U.S. banks, we find that bank risk increases with CEOs’ social networks. Our results are robust with a bank fixed-effects model and a difference-in-difference approach, as well as with various alternative bank risk measures. Alternative explanations such as corporate governance, managerial ownership, compensation, or CEO ability do not drive the findings. We evaluate potential channels through which social networks affect bank risk and find that CEO social networks increase bank risk more when banks face opaque information environments, when CEO job market conditions worsen, and when there are higher odds of group-think mentality in the networks. We further find that social networks present banks with an inefficient trade-off between risk and return, showing a “dark side” of social networks.

Keywords: Risk-taking, social networks, bank CEOs

JEL Classification: L14, G21, G31

Suggested Citation

Fang, Yiwei and Hasan, Iftekhar and Liu, Liuling and Wang, Haizhi, Do Social Networks Encourage Risk-Taking? Evidence from Bank CEOs (November 2016). BAFFI CAREFIN Centre Research Paper No. 2016-41. Available at SSRN: https://ssrn.com/abstract=2869842 or http://dx.doi.org/10.2139/ssrn.2869842

Yiwei Fang

Illinois Institute of Technology ( email )

Stuart Graduate School of Business
565 W. Adams St.
Chicago, IL 60661
United States

Iftekhar Hasan (Contact Author)

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

Liuling Liu

Bowling Green State University - College of Business Administration ( email )

Bowling Green, OH 43403
United States

Haizhi Wang

Illinois Institute of Technology - Stuart School of Business ( email )

Stuart Graduate School of Business
565 W. Adams St.
Chicago, IL 60661
United States

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