An Overconfident CEO vs A Rational Board: The Tale About Bank Risk-Taking

32 Pages Posted: 21 Nov 2019 Last revised: 6 Dec 2019

See all articles by Anastasia Stepanova

Anastasia Stepanova

National Research University Higher School of Economics

Anastasia Suraeva

National Research University Higher School of Economics

Date Written: November 19, 2019

Abstract

Bank risk-taking behavior is of significant interest for researches and policy makers because financial failures due to excessive risk in this sector can have severe consequences for the bank’s numerous stakeholders and for the macroeconomic system overall. A growing literature investigates the main factors contributing to “well above average” risk. In particular, this study explains risk strategies in firms taking into account the bounded rationality of corporate governance agents. On a panel dataset of 110 listed US banks in the period of 2011-2016 empirical evidence is provided that excessive risk-taking in banks arises from the cognitive bias of the overconfidence of CEO decision-making. The study also presents how the impact of an overconfident CEO on risk-taking is affected considering the interaction of CEO overconfidence with the board of directors. It was revealed that the CEO's positive influence on risk is moderated if the board is an effective monitoring mechanism with the presence of independent directors who are experts in the financial sphere.

Keywords: bank risk-taking, CEO overconfidence, board of directors, behavioral finance, behavioral biases

JEL Classification: G21, G39

Suggested Citation

Stepanova, Anastasia N. and Suraeva, Anastasia, An Overconfident CEO vs A Rational Board: The Tale About Bank Risk-Taking (November 19, 2019). Higher School of Economics Research Paper No. WP BRP 78/FE/2019. Available at SSRN: https://ssrn.com/abstract=3489783 or http://dx.doi.org/10.2139/ssrn.3489783

Anastasia N. Stepanova (Contact Author)

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

Anastasia Suraeva

National Research University Higher School of Economics ( email )

136, Rodionova street
25/12, Bolshaya pecherskaya street
Nizhniy Novgorod, 603155
Russia

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