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An Overconfident CEO VS A Rational Board: The Tale About Bank Risk-Taking

Author

Listed:
  • Anastasia Stepanova

    (National Research University Higher School of Economics)

  • Anastasia Suraeva

    (National Research University Higher School of Economics)

Abstract

Bank risk-taking behavior is of significant interest for researches and policy makers because financial failures due to excessive risk in this sector can have severe consequences for the bank’s numerous stakeholders and for the macroeconomic system overall. A growing literature investigates the main factors contributing to “well above average” risk. In particular, this study explains risk strategies in firms taking into account the bounded rationality of corporate governance agents. On a panel dataset of 110 listed US banks in the period of 2011-2016 empirical evidence is provided that excessive risk-taking in banks arises from the cognitive bias of the overconfidence of CEO decision-making. The study also presents how the impact of an overconfident CEO on risk-taking is affected considering the interaction of CEO overconfidence with the board of directors. It was revealed that the CEO's positive influence on risk is moderated if the board is an effective monitoring mechanism with the presence of independent directors who are experts in the financial sphere

Suggested Citation

  • Anastasia Stepanova & Anastasia Suraeva, 2019. "An Overconfident CEO VS A Rational Board: The Tale About Bank Risk-Taking," HSE Working papers WP BRP 78/FE/2019, National Research University Higher School of Economics.
    • Handle: RePEc:hig:wpaper:78/fe/2019
    as

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    File URL: https://wp.hse.ru/data/2019/11/19/1533788002/78FE2019.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    bank risk-taking; CEO overconfidence; board of directors; behavioral finance; behavioral biases;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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