The Stock Market and Bank Risk-Taking

Antonio Falato (antonio.falato@frb.gov) and David Scharfstein

No 22689, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We present evidence that pressure to maximize short-term stock prices and earnings leads banks to increase risk. We start by showing that banks increase risk when they transition from private to public ownership through a public listing or an acquisition. The increase in risk is greater than for a control group of banks that intended but failed to transition from private to public ownership, a result that is robust to using a plausibly exogenous instrument for failed transitions. The increase in risk is also greater than for a control group of banks that were acquired but did not change their listing status. We establish that pressure to maximize short-term stock prices helps to explain these findings by showing that the increase in risk is larger for newly public banks that are more focused on short-term stock prices and performance.

JEL-codes: G01 G2 G21 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-ban and nep-fmk
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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