Bank monitoring and CEO risk-taking incentives

Saunders, Anthony; Song, Keke

doi:10.1016/j.jbankfin.2017.12.003

Cited by 26 publications

(16 citation statements)

References 46 publications

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“…Therefore, strong monitoring could weaken the potential decrease in the quality of the borrowers' financial information that local corruption could encourage. In addition, Saunders and Song (2018) find that a strong bank monitoring effort exerts a chilling effect on the risk-taking behavior of borrowers. This could stem from the disciplining role of the negative consequences that lenders could impose on borrowers in case of violation of the loan contract terms.…”

Section: The Mediating Role Of the Monitoring Effortmentioning

confidence: 97%

Local Public Corruption and Bank Lending Activity in the United States

2020

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Using a conviction-based measure, we find that local (state-level) public corruption exerts a negative effect on the lending activity of US banks. Our baseline estimations show that the difference in public corruption between, for example, Alabama, where corruption is high, and Minnesota, where corruption is low, implies that banks headquartered in the former state grant 0.55% less credit (or $3.52 million for the average bank) ceteris paribus. Using proxies for relationship lending and monitoring, we also find that these bank characteristics weaken the negative effect of public corruption on lending. These results are robust to tests that address endogeneity, to the use of perception-based measures of corruption, and after controlling for credit demand conditions. In further analysis, we show that these effects are more evident for smaller banks and banks operating in a single state. These findings provide evidence that public corruption could facilitate information asymmetry in the lending market and, thus, could hinder local development by reducing bank credit.

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Section: The Mediating Role Of the Monitoring Effortmentioning

confidence: 97%

Local Public Corruption and Bank Lending Activity in the United States

2020

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“…Therefore, strong monitoring could weaken the potential decrease in the quality of the borrowers' financial information that local corruption could encourage. In 1 3 addition, Saunders and Song (2018) find that a strong bank monitoring effort exerts a chilling effect on the risk-taking behavior of borrowers. This could stem from the disciplining role of the negative consequences that lenders could impose on borrowers in case of violation of the loan contract terms.…”

Section: The Mediating Role Of the Monitoring Effortmentioning

confidence: 99%

Local Public Corruption and Bank Lending Activity in the United States

2019

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“…On the other hand, lower interest rates could increase agency problems between managers and creditors since CEOs might look for different choices of investing to obtain high yields, increasing moral hazard. According to Hong (2019) and Saunders and Song (2018), external shocks on the creditor-shareholder agency conflict are solved by the creditor channel with preference over the manager channel. In the case under study, the creditor channel would imply a relaxation of monitoring in line with the risk-taking channel of the creditor.…”

Section: Hypothesesmentioning

confidence: 99%

“…In addition, a low-interest-rate policy has been found to reduce the perception of credit risk and increase the risk tolerance of banks as credit suppliers through different channels (Bernanke & Gertler, 1995;Borio & Zhu, 2012;Paligorova & Santos, 2017). Therefore, we can expect that the relevant monitoring role of creditors in controlling the mangers' risk-taking incentives (Balsam et al, 2018;Saunders & Song, 2018) could be offset or weakened by the creditors' risk-taking channel. In this way, the agency conflict between shareholders and creditors would be attenuated in a low-interest setting by the alignment of shareholders' and creditors' interests to obtain higher returns.…”

Section: Introductionmentioning

confidence: 99%

“…In this way, the firms’ boards can use CEOs equity compensation to align shareholders’ and managers’ interests to solve this agency conflict. In fact, empirical evidence has demonstrated quick adjustment of CEO compensation in response to external shocks (Bakke et al, 2016; Gormley et al, 2013; Hayes et al, 2012; Hong, 2019) and subsequent modification of business policies to take or cut business risks (Saunders & Song, 2018).…”

Section: Introductionmentioning

confidence: 99%

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Low interest rates and executive risk-taking incentives: Evidence from the United States

Castro

Fernández

Castaño

et al. 2020

BRQ Business Research Quarterly

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This article contributes to the literature by indicating how certain monetary policies impact the compensation incentives of US managers to adopt riskier business policies. Specifically, based on the agency problems between shareholders and managers and between shareholders and creditors, a research framework is developed to identify the influence of low interest rates on managers’ risk-taking incentives proxied by the sensitivity of executive compensation to stock return volatility (Vega). We examine 1,293 firms in the United States between 2000 and 2016, and the results indicate that low interest rates increase the managers’ short-term risk-taking incentives and that those incentives contribute to the risk effectively taken by the firm. Our results are robust to the use of alternative monetary proxies and to the presence of passive versus active institutional shareholders. JEL CLASSIFICATION E41; E43; E51; M12; M52

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Bank monitoring and CEO risk-taking incentives

Cited by 26 publications

References 46 publications

Local Public Corruption and Bank Lending Activity in the United States

Local Public Corruption and Bank Lending Activity in the United States

Local Public Corruption and Bank Lending Activity in the United States

Low interest rates and executive risk-taking incentives: Evidence from the United States

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