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How does Ownership Structure Influence Bank Risk? Analyzing the Role of Managerial Incentives

Mónica López-Puertas Lamy ()
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Mónica López-Puertas Lamy: Universidad Carlos III de Madrid

No 1208, Working Papers from Departament Empresa, Universitat Autònoma de Barcelona

Abstract: This paper analyzes how ownership concentration and managerial incentives influences bank risk for a large sample of US banks over the period 1997-2007. Using 2SLS simultaneous equations models, we show that ownership concentration has a positive total effect on bank risk. This is the result of a positive direct effect, which reflects monitoring and opportuni stic behavior, and a negative indirect effect, which works through the design of managerial incentive contracts and refl ects shareholder preferences toward risk. Large shareholders reduce bank risk by reducing the sensitivity of CEO wealth to stock volatility (Vega) and by increasing the CEO pay-performance sensitivity (Delta). In addition, we show that the direct and indirect effect of ownership concentration on bank risk depends on the type of the largest shareholder (a family, a bank, a corporation or an institutional investor), as well as, on the total shareholding held by each type as a group. Our results suggest that the positive relation between ownership concentration and risk is not the result of references towards more risk. Rather, they point at opportunistic behavior of large shareholders.

Keywords: Ownership Structure, Managerial Incentives; Risk taking, Delta, Vega, Stock Options. (search for similar items in EconPapers)
JEL-codes: G01 G21 G31 G32 G34 J33 (search for similar items in EconPapers)
Date: 2012-11, Revised 2012-11
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Published in Working Papers at the Department of Business, November pages 1-67

Downloads: (external link) Revised version, 2012 (application/pdf)

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