Impact of Corporate Ownership on Risk-Taking and Returns at Thrift Institutions

Abstract

This paper examines the relationship between ownership structure, other corporate governance variables, and firm risk-taking and returns for the period 1990 to 2003. Our results suggest that the persistent, underlying relationship between insider ownership and risk-taking is U-shaped for both stock and operating returns. The Sharpe ratio for operating returns exhibits an inverted U-shaped association with insider ownership. These observations are consistent with insiders achieving the efficient frontier between risk and return, i.e. although risk-taking varies with the level of ownership, average returns are higher when risk is higher. We also find strong evidence of negative linear relationships between institutional ownership and both operating and stock volatility and positive relationships with operating returns and Tier 1 capital.