Bank CEO risk-taking incentives and bank lending quality

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...

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Bibliographic Details
Published in:Review of quantitative finance and accounting 2023-04, Vol.60 (3), p.949-981
Main Authors: Zhai, Rui-Xiang, Ho, Po-Hsin, Lin, Chih-Yung, Linh, Tran Thi Thuy
Format: Article
Language:English
Subjects:
Accounting/Auditing
Banking industry
Chief executive officers
Corporate Finance
Corporate governance
Covenants
Econometrics
Economics and Finance
Finance
Incentives
Operations Research/Decision Theory
Original Research
Risk taking
TARP funds
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Summary: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.
ISSN:0924-865X
1573-7179
DOI:10.1007/s11156-022-01119-y