Bank CEO risk-taking incentives and bank lending quality

Rui Xiang Zhai, Po Hsin Ho, Chih Yung Lin*, Tran Thi Thuy Linh

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

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.

Original languageEnglish
JournalReview of Quantitative Finance and Accounting
DOIs
StateAccepted/In press - 2022

Keywords

  • Bank loan contracts
  • CEO risk-taking incentives
  • Corporate governance
  • Cumulative abnormal returns
  • Lending quality

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