CEO Ownership, Risk Management, and Bank Runs at Unlimited Liability Banks During the 1890s

Abstract

Using unique data on California state banks that were subject to the unlimited liability rule, we examine the relationship between liability of bank presidents, risk management, and bank runs during the panic of 1893. During this period, bank presidents were mandated to hold bank stocks with features resembling restricted stock option and clawback provisions of today. These measures were designed to discourage excessive risk-taking by holding managers personally accountable in the event of a bank failure. We find that banks whose presidents have a greater liability exposure adopt more conservative risk management strategies and are thus less likely to experience bank runs and failures. Our study implies that regulatory policies on bank executives affect the risk management methods and the default risk of banks.

Keywords: Managerial ownership, Managerial liability, Corporate governance, Bank Risktaking, Panic of 1893

JEL Classification: G21, N12, N22, D82, E32