The Dark Side of Bank CEO Risk-taking Incentives: Evidence from Bank Lending Decisions

52 Pages Posted: 9 Jul 2019

See all articles by Po-Hsin Ho

Po-Hsin Ho

National Central University at Taiwan - Department of Finance

Chih-Yung Lin

National Chiao-Tung University

Tran Thi Thuy Linh

Yuan Ze University

Date Written: September 1, 2018

Abstract

This paper investigates how bank CEO risk-taking incentives influence bank lending decisions. Consistent with the existing CEO incentive literature, we find that CEOs with higher risk-taking incentives (vega) tend to relax their lending standards in bank loan contracts to pursue higher compensation. We find that banks with a high vega tend to charge a significantly lower loan spread, demand fewer loan covenants, and have lower probability to seek collateral. Results become weaker when banks have strong corporate governance mechanisms, supporting the proposition that high CEO risk-taking incentives may create an agency problem between a bank manager and shareholders.

Keywords: CEO incentives, bank loan contracts, corporate governance, agency problem

JEL Classification: G21, G32, G34

Suggested Citation

Ho, Po-Hsin and Lin, Chih-Yung and Linh, Tran Thi Thuy, The Dark Side of Bank CEO Risk-taking Incentives: Evidence from Bank Lending Decisions (September 1, 2018). Available at SSRN: https://ssrn.com/abstract=3416023 or http://dx.doi.org/10.2139/ssrn.3416023

Po-Hsin Ho

National Central University at Taiwan - Department of Finance ( email )

No. 300, Zhongda Rd.
Zhongli District
Taoyuan City, 32001
Taiwan

Chih-Yung Lin (Contact Author)

National Chiao-Tung University ( email )

Taiwan

Tran Thi Thuy Linh

Yuan Ze University ( email )

135, Far-East Rd., Chung-Li
Taoyuan, ROC
Taiwan

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