Bank CEO risk-taking incentives and bank lending quality

Rui-Xiang Zhai (), Po-Hsin Ho (), Chih-Yung Lin and Tran Thi Thuy Linh ()
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Rui-Xiang Zhai: National Kaohsiung University of Science and Technology
Po-Hsin Ho: National Central University
Tran Thi Thuy Linh: Thai Nguyen University of Economics and Business Administration

Review of Quantitative Finance and Accounting, 2023, vol. 60, issue 3, No 4, 949-981

Abstract: Abstract We investigate how bank CEO risk-taking incentives (Vega) influence lending decisions. We find that Vega is negatively related to the cumulative abnormal returns around loan announcements for banks. Our evidence shows that banks with high Vega charge a significantly lower loan spread, demand fewer loan covenants, and have a lower probability of requesting collateral. The results become weaker when banks have strong corporate governance mechanisms. We conduct a difference-in-differences analysis of banks who receive troubled asset relief program (TARP) funding that puts pressure on banks to reduce their option. We find that the Vega effect significantly declines after TARP.

Keywords: CEO risk-taking incentives; Bank loan contracts; Cumulative abnormal returns; Corporate governance; Lending quality (search for similar items in EconPapers)
JEL-codes: G21 G32 G34 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11156-022-01119-y

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