Managerial Ownership and Bank Risk Taking

This paper examines the relation between managerial ownership and risk taking by banks for a large sample of international financial institutions. We assess theories concerning conflicts between managers and owners over risk taking behavior. We argue that managerial risk taking of bank managers is mitigated when they are provided with equity incentives. Our results suggest that this is the case for managers that hold a relatively low percentage (< 10%) of the total shares. Managerial equity incentives may therefore serve as a risk reduction instrument. That is, in order to reduce the bank’s default risk, bank manag ers’ interests should not necessarily be aligned with the interest of the outside shareholder.