An Overconfident CEO VS A Rational Board: The Tale About Bank Risk-Taking

Anastasia Stepanova () and Anastasia Suraeva ()
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Anastasia Suraeva: National Research University Higher School of Economics

HSE Working papers from National Research University Higher School of Economics

Abstract: Bank risk-taking behavior is of significant interest for researches and policy makers because financial failures due to excessive risk in this sector can have severe consequences for the bank’s numerous stakeholders and for the macroeconomic system overall. A growing literature investigates the main factors contributing to “well above average” risk. In particular, this study explains risk strategies in firms taking into account the bounded rationality of corporate governance agents. On a panel dataset of 110 listed US banks in the period of 2011-2016 empirical evidence is provided that excessive risk-taking in banks arises from the cognitive bias of the overconfidence of CEO decision-making. The study also presents how the impact of an overconfident CEO on risk-taking is affected considering the interaction of CEO overconfidence with the board of directors. It was revealed that the CEO's positive influence on risk is moderated if the board is an effective monitoring mechanism with the presence of independent directors who are experts in the financial sphere

Keywords: bank risk-taking; CEO overconfidence; board of directors; behavioral finance; behavioral biases (search for similar items in EconPapers)
JEL-codes: G21 G39 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2019
New Economics Papers: this item is included in nep-cfn and nep-upt
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Published in WP BRP Series: Financial Economics / FE, November 2019, pages - 32

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Persistent link: https://EconPapers.repec.org/RePEc:hig:wpaper:78/fe/2019

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