Bank CEO careers after bailouts: The effects of management turnover on bank risk

Abstract

We study whether bank bailouts affect CEO turnover and its subsequent impact on bank risk. Exploiting the Troubled Asset Relief Program (TARP) of 2008, we find that TARP funds temporarily decreased the likelihood of bank CEO turnover during the crisis (2008-2010) but significantly increased CEO changes afterwards. Our results show that replacing TARP CEOs reduced individual bank risk as well as bank’s contributions to the systemic risk. Finally, we find that TARP CEO turnover was mainly driven by a decrease in the bank’s political capital. Overall, our evidence suggests that bank CEO turnover, following bailout, could mitigate moral hazard problems resulting in positive consequences for the stability of the financial sector.

Keywords: CEO Career, CEO Turnover, TARP, Risk, Bail-Out

JEL Classification: G34, G2, G28