To What Extent does CEO Behavior Enhance Risk-Taking? A Banking Sector Related Evidence
Keywords:bank risk-taking, corporate governance, CEO behavior, CEO dominance
The present paper is designed to examine the extent of the Chief Executive Officer’s (CEO) behavioral impact on the bank risk-taking venture. The sample involves a set of 540 banks, observed over a longitudinal panel data set (2007-2019). A multiple linear-regression technique has been applied. The attained results prove to highlight that when CEOs seem to enjoy a great deal of overconfidence, they are more likely to influence the board’s decision-making to their proper risk-reducing advantage. The greater the CEO dominance is, the more decreased the bank specific risk turns out to be, given the significantly positive association of CEO dominance with the risk-taking procedure. This paper's results have implication for banks and policymakers looking to promote risk-taking. This paper could be useful to shareholders as they aim to recruit the most gifted CEOs with the relevant set of competences in order to meet shareholders' goals and enhance bank competitiveness.JEL Codes - G23, G32, G41
Aabo, T., Hvistendahl, N. T., and Kring, J., 2020. Corporate risk: CEO overconfidence and incentive compensation. Managerial Finance, 47(2), 244-265. http://dx.doi.org/10.1108/MF-05-2020-0278
Abatecola, G., and Cristofaro, M., 2018. Hambrick and Mason's "Upper Echelons Theory": Evolution and open avenues. Journal of Management History, 26(1), 116-136.
Abdul Hamid, B., Azmi, W., and Ali, M., 2020. Bank Risk and Financial Development: Evidence From Dual Banking Countries. Emerging Markets Finance & Trade, 56(2), 286-304. http://dx.doi.org/10.1080/1540496X.2019.1669445
Adams, M., and Jiang, W., 2017. Do chief executives' traits affect the financial performance of risk-trading firms? Evidence from the UK insurance industry. British Journal of Management, 28(3), 481-501. http://dx.doi.org/10.1111/1467-8551.12222
Ahmed, S., Sihvonen, J., and Vahamaa, S., 2019. CEO facial masculinity and bank risk-taking. Personality and Individual Differences, 138, 133-139. http://dx.doi.org/10.1016/j.paid.2018.09.029
Altunbas, Y., Thornton, J., and Uymaz, Y., 2020. The effect of CEO power on bank risk: Do boards and institutional investors matter? Finance Research Letters, 33, 101202. http://dx.doi.org/10.1016/j.frl.2019.05.020
Anilov, A. E., and Ivashkovskaya, I. V., 2020. Do boards of directors affect CEO behavior? Evidence from payout decisions. The Journal of Management and Governance, 24(4), 989-1017. http://dx.doi.org/10.1007/s10997-019-09491-z
Azila-Gbettor, E. M., Honyenuga, B. Q., Berent-Braun, M. M., and Kil, A., 2018. Structural aspects of corporate governance and family firm performance: A systematic review. Journal of Family Business Management, 8(3), 306-330. http://dx.doi.org/10.1108/JFBM-12-2017-0045
Bandiera, O., Prat, A., Hansen, S., and Sadun, R., 2020. CEO behavior and firm performance. Journal of Political Economy, 128(4), 1325-1369. http://dx.doi.org/10.1086/705331
Bauweraerts, J., and Colot, O., 2018. Exploring Top Management Team Composition in Private Family Firms. International Advances in Economic Research, 24(3), 283-284. http://dx.doi.org/10.1007/s11294-018-9697-5
Bebchuk, L. A., Cremers, K. M., and Peyer, U. C., 2011. The CEO pay slice. Journal of Financial Economics, 102(1), 199-221. http://dx.doi.org/10.1016/j.jfineco.2011.05.006
Becker, B., and Stromberg, P., 2012. Fiduciary duties and equity-debtholder conflicts. Review of Financial Studies, 25(6), 1931-1969. http://dx.doi.org/10.1093/rfs/hhs006
Behr, P., and Wang, W., 2020. The (un)intended effects of government bailouts: The impact of TARP on the interbank market and bank risk-taking. Journal of Banking & Finance, 116, 105820. http://dx.doi.org/https://doi.org/10.1016/j.jbankfin.2020.105820
Beltratti, A., and Stulz, R. M., 2012. The credit crisis around the globe: Why did some banks perform better? Journal of Financial Economics, 105(1), 1-17. http://dx.doi.org/10.1016/j.jfineco.2011.12.005
Bennett, R. L., and Unal, H., 2010. The cost effectiveness of the private-sector resolution of failed bank assets. FDIC Center for Financial Research Working Paper, 2009-11.
Benzing, J., and Börner, C. J., 2015. The link between CEO incentive structures, managerial power, and firm risk in the financial services industry: A comprehensive analysis of US banking and insurance firms. Corporate Ownership & Control, 371.
Black, D. E., and Gallemore, J., 2013. Bank executive overconfidence and delayed expected loss recognition. SSRN, 2144293.
Borio, C., and Zhu, H., 2012. Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism? Journal of Financial Stability, 8(4), 236-251. http://dx.doi.org/10.1016/j.jfs.2011.12.003
Boungou, W., 2020. Negative interest rates policy and banks' risk-taking: Empirical evidence. Economics Letters, 186, 108760. http://dx.doi.org/10.1016/j.econlet.2019.108760
Brammertz, W., 2010. Risk and regulation. Journal of Financial Regulation and Compliance, 18(1), 46-55. http://dx.doi.org/10.1108/13581981011019624
Broll, U., Welzel, P., and Wong, K. P., 2018. Ambiguity preferences, risk taking and the banking firm. Eurasian Economic Review, 8(3), 343-353. http://dx.doi.org/10.1007/s40822-018-0096-2
Cain, M. D., and McKeon, S. B., 2016. CEO personal risk-taking and corporate policies. Journal of Financial and Quantitative Analysis, 51(1), 139-164. http://dx.doi.org/10.1017/S0022109016000041
Caliskan, D., and Doukas, J. A., 2015. CEO risk preferences and dividend policy decisions. Journal of Corporate Finance, 35, 18-42. http://dx.doi.org/10.1016/j.jcorpfin.2015.08.007
Calomiris, C. W., and Ramirez, C. D., 2018. The Political Economy of Bank Entry Restrictions: A Theory of Unit Banking Public Choice Analyses of American Economic History (pp. 99-119): Springer. http://dx.doi.org/10.1007/978-3-319-95819-4_5
Cerasi, V., Deininger, S. M., Gambacorta, L., and Oliviero, T., 2020. How post-crisis regulation has affected bank CEO compensation. Journal of International Money and Finance, 104, 102153. http://dx.doi.org/10.1016/j.jimonfin.2020.102153
Chen, Z., and Ebrahim, A., 2018. Turnover threat and CEO risk-taking behavior in the banking industry. Journal of Banking & Finance, 96, 87-105. http://dx.doi.org/10.1016/j.jbankfin.2018.08.007
Cheng, J. T., Tracy, J. L., Foulsham, T., Kingstone, A., and Henrich, J., 2013. Two ways to the top: Evidence that dominance and prestige are distinct yet viable avenues to social rank and influence. Journal of Personality and Social Psychology, 104(1), 103-125. http://dx.doi.org/10.1037/a0030398
De Haan, J., and Vlahu, R., 2016. Corporate governance of banks: A survey. Journal of Economic Surveys, 30(2), 228-277. http://dx.doi.org/10.1111/joes.12101
Desai, A., Kroll, M., and Wright, P., 2003. CEO duality, board monitoring, and acquisition performance: A test of competing theories. The Journal of Business Strategy, 20(2), 137.
DeYoung, R., and Torna, G., 2013. Nontraditional banking activities and bank failures during the financial crisis. Journal of Financial Intermediation, 22(3), 397-421. http://dx.doi.org/10.1016/j.jfi.2013.01.001
Diallo, B., 2017. Corporate governance, bank concentration and economic growth. Emerging Markets Review, 32, 28-37. http://dx.doi.org/10.1016/j.ememar.2017.05.003
Doukas, J. A., and Petmezas, D., 2007. Acquisitions, overconfident managers and self-attribution bias. European Financial Management, 13(3), 531-577. http://dx.doi.org/10.1111/j.1468-036X.2007.00371.x
Duru, A., Iyengar, R. J., and Zampelli, E. M., 2016. The dynamic relationship between CEO duality and firm performance: The moderating role of board independence. Journal of Business Research, 69(10), 4269-4277. http://dx.doi.org/10.1016/j.jbusres.2016.04.001
Elamer, A. A., AlHares, A., Ntim, C. G., and Benyazid, I., 2018. The corporate governance–risk-taking nexus: evidence from insurance companies. International Journal of Ethics and Systems, 34(4), 493-509. http://dx.doi.org/10.1108/IJOES-07-2018-0103
Elyasiani, E., and Zhang, L., 2015. Bank holding company performance, risk, and "busy" board of directors. Journal of Banking & Finance, 60, 239-251. http://dx.doi.org/10.1016/j.jbankfin.2015.08.022
Fralich, R., and Fan, H., 2018. Legislative political connections and CEO compensation in China. Asian Business & Management, 17(2), 112-139. http://dx.doi.org/10.1057/s41291-018-0034-x
Friedman Peahl, A., Heisler, M., Essenmacher, L. K., Dalton, V. K., Chopra, V., Admon, L. K., and Moniz, M. H., 2020. A comparison of international prenatal care guidelines for low-risk women to inform high-value care. American Journal of Obstetrics and Gynecology, 222(5), 505-507. http://dx.doi.org/10.1016/j.ajog.2020.01.021
Fritz, M. S., and Arthur, A. M., 2017. Moderator Variables: Oxford University Press.
Geiler, P., and Renneboog, L., 2016. Executive remuneration and the payout decision. Corporate Governance, 24(1), 42-63. http://dx.doi.org/10.1111/corg.12127
Gervais, S., Heaton, J. B., and Odean, T., 2011. Overconfidence, compensation contracts, and capital budgeting. The Journal of Finance, 66(5), 1735-1777. http://dx.doi.org/10.1111/j.1540-6261.2011.01686.x
Gomulya, D. M., Wong, E. M., and Ormiston, M., 2019. CEO Dominance and Newly Public Firms’ Survival. Academy of Management Proceedings, 1. http://dx.doi.org/10.5465/AMBPP.2019.14413abstract
Graham, J. R., Harvey, C. R., and Puri, M., 2013. Managerial attitudes and corporate actions. Journal of Financial Economics, 109(1), 103-121. http://dx.doi.org/10.1016/j.jfineco.2013.01.010
Groebner, D. F., Shannon, P. W., Fry, P. C., and Smith, K. D., 2008. Business Statistics: A Decision-Making Approach (7th ed.): Prentice-Hall.
Gyamerah, S., Amo, H. F., and Adomako, S., 2020. Corporate governance and the financial performance of commercial banks in Ghana. Journal of Research in Emerging Markets, 2(4), 33-47. http://dx.doi.org/10.30585/jrems.v2i4.541
Hambrick, D. C., and Crossland, C., 2018. A Strategy for Behavioral Strategy: Appraisal of Small, Midsize, and Large Tent Conceptions of This Embryonic Community Behavioral Strategy in Perspective (Vol. 39, pp. 23-39): Emerald Publishing Limited. http://dx.doi.org/10.1108/S0742-332220180000039002
Hambrick, D. C., and Mason, P. A., 1984. Upper echelons: The organization as a reflection of its top managers. Academy of Management Review, 9(2), 193-206. http://dx.doi.org/10.5465/amr.1984.4277628
Handriani, E., Ghozali, I., and Hersugodo, H., 2021. Corporate governance on financial distress: Evidence from Indonesia. Management Science Letters, 11(6), 1833-1844. http://dx.doi.org/10.5267/j.msl.2021.1.020
Haque, F., and Ntim, C. G., 2018. Environmental policy, sustainable development, governance mechanisms and environmental performance. Business Strategy and the Environment, 27(3), 415-435. http://dx.doi.org/10.1002/bse.2007
Ho, P. H., Huang, C. W., Lin, C. Y., and Yen, J. F., 2016. CEO overconfidence and financial crisis: Evidence from bank lending and leverage. Journal of Financial Economics, 120(1), 194-209. http://dx.doi.org/10.1016/j.jfineco.2015.04.007
Kabir, M. N., Worthington, A., and Gupta, R., 2015. Comparative credit risk in Islamic and conventional bank. Pacific-Basin Finance Journal, 34, 327-353. http://dx.doi.org/10.1016/j.pacfin.2015.06.001
Kaiser, H. F., 1974. An index of factorial simplicity. Psychometrika, 39(1), 31-36. http://dx.doi.org/10.1007/BF02291575
Kamiya, S., Kim, Y. H., and Park, S., 2019. The face of risk: CEO facial masculinity and firm risk. European Financial Management, 25(2), 239-270. http://dx.doi.org/10.1111/eufm.12175
Kim, J. S., Kaye, J., and Wright, L. K., 2001. Moderating and mediating effects in causal models. Issues in Mental Health Nursing, 22(1), 63-75. http://dx.doi.org/10.1080/016128401750158768
Kisfalvi, V., Sergi, V., and Langley, A., 2016. Managing and mobilizing microdynamics to achieve behavioral integration in top management teams. Long Range Planning, 49(4), 427-446. http://dx.doi.org/10.1016/j.lrp.2015.12.015
Kolm, J., Laux, C., and Loranth, G., 2017. Bank regulation, CEO compensation, and boards. Review of Finance, 21(5), 1901-1932.
Laeven, L., and Levine, R., 2009. Bank governance, regulation and risk taking. Journal of Financial Economics, 93(2), 259-275. http://dx.doi.org/10.1016/j.jfineco.2008.09.003
Malmendier, U., and Tate, G., 2015. Behavioral CEOs: The role of managerial overconfidence. The Journal of Economic Perspectives, 29(4), 37-60. http://dx.doi.org/10.1257/jep.29.4.37
Minnick, K., and Rosenthal, L., 2014. Stealth compensation: Do CEOs increase their pay by influencing dividend policy? Journal of Corporate Finance, 25, 435-454. http://dx.doi.org/10.1016/j.jcorpfin.2014.01.005
O'Reilly, C. A., and Hall, N., 2021. Grandiose narcissists and decision making: Impulsive, overconfident, and skeptical of experts-but seldom in doubt. Personality and Individual Differences, 168, 110280. http://dx.doi.org/10.1016/j.paid.2020.110280
Orens, R., and Reheul, A. M., 2013. Do CEO demographics explain cash holdings in SMEs? European Management Journal, 31(6), 549-563. http://dx.doi.org/10.1016/j.emj.2013.01.003
Rezaee, Z., Alipour, M., Faraji, O., Ghanbari, M., and Jamshidinavid, B., 2020. Environmental disclosure quality and risk: the moderating effect of corporate governance: Sustainability Accounting, Management and Policy Journal.
Roll, R., 1986. The hubris hypothesis of corporate takeovers. The Journal of Business, 59, 197-216. http://dx.doi.org/10.1086/296325
Shapira, Z., 1995. Risk taking: A managerial perspective: Russell Sage Foundation.
Sheikh, S., 2019. CEO power and corporate risk: The impact of market competition and corporate governance. Corporate Governance, 27(5), 358-377. http://dx.doi.org/10.1111/corg.12285
Shrader, R. C., Simon, M., and Stanton, S., 2020. Financial forecasting and risky decisions: An experimental study grounded in Prospect theory. The International Entrepreneurship and Management Journal, ooo, 1-15. http://dx.doi.org/10.1007/s11365-020-00697-4
Skala, D., and Weill, L., 2018. Does CEO gender matter for bank risk? Economic Systems, 42(1), 64-74. http://dx.doi.org/10.1016/j.ecosys.2017.08.005
Srivastav, A., and Hagendorff, J., 2016. Corporate governance and bank risk-taking. Corporate Governance, 24(3), 334-345. http://dx.doi.org/10.1111/corg.12133
Tang, J., and Crossan, M., 2017. Are dominant CEOs the saviors of troubled firms? Long Range Planning, 50(6), 782-793. http://dx.doi.org/10.1016/j.lrp.2016.03.002
Ting, H. I., Chueh, H., and Chang, P. R., 2017. CEO power and its effect on performance and governance: Evidence from Chinese banks. Emerging Markets Review, 33, 42-61. http://dx.doi.org/10.1016/j.ememar.2017.09.005
Vandekerkhof, P., Steijvers, T., Hendriks, W., and Voordeckers, W., 2019. The effect of nonfamily managers on decision-making quality in family firm TMTs: The role of intra-TMT power asymmetries. Journal of Family Business Strategy, 10(3), 100272. http://dx.doi.org/10.1016/j.jfbs.2019.01.002
Victoravich, L., Buslepp, W. L., Xu, T., and Grove, H., 2011. CEO power, equity incentives, and bank risk taking. SSRN, 1909547, 1909547. http://dx.doi.org/10.2139/ssrn.1909547
Zhou, Y., Kara, A., and Molyneux, P., 2019. Chair-CEO generation gap and bank risk-taking. The British Accounting Review, 51(4), 352-372. http://dx.doi.org/10.1016/j.bar.2019.03.005
How to Cite
Copyright (c) 2021 SCIENTIFIC ANNALS OF ECONOMICS AND BUSINESS
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
All accepted papers are published on an Open Access basis.
The Open Access License is based on the Creative Commons license.
The non-commercial use of the article will be governed by the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License as currently displayed on https://creativecommons.org/licenses/by-nc-nd/4.0
Under the Creative Commons Attribution-NonCommercial-NoDerivatives license, the author(s) and users are free to share (copy, distribute and transmit the contribution) under the following conditions:
1. they must attribute the contribution in the manner specified by the author or licensor,
2. they may not use this contribution for commercial purposes,
3. they may not alter, transform, or build upon this work.