FEK seminar series - Shaker Ahmed (University of Vaasa)
Torsdag 5 oktober, 2023kl. 13:30 - 14:30
CEO Myopia and Bank Risk-taking
Abstract: This paper studies the association between bank risk-taking and executive decision horizon for long-tenured bank CEOs. As CEOs with long tenures or imminent retirement age have shorter decision horizons, they tend to focus more on stability rather than on risky investment ventures. Consequently, bank riskiness can decrease (increase) when the expected managerial decision horizon is shorter (longer). Using a sample of publicly traded large U.S. banks, we find that the expected CEO decision horizon positively impacts bank risk-taking. Specifically, CEOs with shorter expected tenures reduce bank risk-taking, whereas their counterparts with longer expected career horizons increase bank riskiness. However, CEO’s expected tenure in the office does not affect insolvency risk. Furthermore, the expected career horizon of large bank CEOs has a more pronounced effect on the banks’ total and systematic risk than that of smaller banks, and the impact has decreased since the global financial crisis. We identify CEO’s pay-performance sensitivity and bank loan growth as the potential policy channel for propagating the expected tenure-driven bank risk-taking. Overall, we document that expected tenure-induced CEO myopic behavior has an important impact on bank risk-taking.