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    Does skin in the game help? Bank franchise value, managerial incentives and ‘going for broke’

    Access Status
    Fulltext not available
    Authors
    Pathan, Md Shams Tabrize
    Haq, M.
    Williams, B.
    Date
    2016
    Type
    Journal Article
    
    Metadata
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    Citation
    Pathan, S. and Haq, M. and Williams, B. 2016. Does skin in the game help? Bank franchise value, managerial incentives and ‘going for broke’. Australian Journal of Management. 41 (2): pp. 271-298.
    Source Title
    Australian Journal of Management
    DOI
    10.1177/0312896214539818
    ISSN
    0312-8962
    Faculty
    Faculty of Business and Law
    School
    School of Economics, Finance and Property
    URI
    http://hdl.handle.net/20.500.11937/76642
    Collection
    • Curtin Research Publications
    Abstract

    © 2015, © The Author(s) 2015. The roles bank franchise value (‘skin in the game’) and CEO ownership play in determining bank risk are studied for large United States Bank Holding Companies. We find robust evidence of a convex relation between bank risk and each of CEO shareholding and franchise value, indicating that increases in each are initially risk decreasing, but as franchise value and CEO ownership increases so too does bank risk. Further, we find that low levels of franchise value combined with high CEO ownership result in managerial incentives aligning with those of shareholders, resulting in increased bank risk (‘going for broke’ or asset substitution). We argue that these results are consistent with those of Robert Merton, but in the context of franchise value rather than bank capital and deposit insurance, and accordingly offer some policy recommendations for regulatory monitoring of bank risk that are consistent with these results.

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