Putting skin in the game
Subtitle: managerial ownership and bank risk-taking
By: Jan Bouwens, Arnt Verriest
Contributors: Verriest, Arnt, author; Harvard Business School
Edition: Revised edition
Series: Working paper / Harvard Business School -- 14-070; Working paper (Harvard Business School) -- 14-070.
Publisher: Harvard Business School
Published: 2014
Place of publication: Boston]
Language: eng
Number of pages: 52
Description: This paper examines the relation between managerial ownership and bank risk exposure for a large sample of international financial institutions. We seek empirical evidence suggested by theories concerning conflicts between managers and owners over risk-taking. We argue that managers holding equity of their bank take less risk because they have fewer opportunities to diversify risk compared with outside shareholders. Our findings are consistent with this idea. We document lower risk levels for banks that employ bank managers with higher equity stakes. Our evidence also suggests that external shareholders affect risk taking via directors representing their interests. We also demonstrate that regulation hardly affects the risk-taking of bank managers holding on their bank's shares. This contrasts with outside shareholders who are more likely to expose their bank to higher risk levels when regulation protects the bank against default. Managerial equity incentives may, therefore, serve as a risk reduction instrument.
Notes: "February 2014. (Revised June 2014.)" -- Publisher's Web site.

Includes bibliographical references (pages 34-36).