Activity Strategies, Agency Problems, and Bank Risk

Tran Dung, M. Kabir Hassan, Isabelle Girerd-Potin () and Pascal Louvet
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Tran Dung: IÉSEG School Of Management [Puteaux]
Isabelle Girerd-Potin: CERAG - Centre d'études et de recherches appliquées à la gestion - UGA - Université Grenoble Alpes
Pascal Louvet: CERAG - Centre d'études et de recherches appliquées à la gestion - UGA - Université Grenoble Alpes

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Abstract: We investigate whether diversification affects bank risk taking in the U.S. banking industry, and whether this relation is partially explained by agency theory. Our results show that U.S. banks with a relatively high share of noninterest income become riskier when moving toward non-interest-income-generating activities, especially activities from investment banking, proprietary trading, and so on. Diversification not only affects conditional average risk, but also the dispersion of risk. Moreover, diversified banks that received assistance from the Troubled Asset Relief Program (TARP) become riskier than diversified nonrecipients after TARP capital injections. Our main findings are robust to a battery of robustness tests. The results are partially explained under agency frameworks related to poor corporate governance.

Date: 2020
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Published in Journal of Financial Research, 2020, 43, pp.575-613. ⟨10.1111/jfir.12216⟩

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Journal Article: ACTIVITY STRATEGIES, AGENCY PROBLEMS, AND BANK RISK (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04809862

DOI: 10.1111/jfir.12216

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