This paper studies how bank managers’ skin-in-the-game affects bank risk management. Since limited liability is the standard for all banks nowadays, it is difficult to empirically asses the effect of additional skin-in-the-game. We use a unique historical setting from one of the largest Dutch banks in the 1920s where managers could directly participate in their banks’ security issuances.
- Speaker
- Date
- Monday 25 Mar 2024, 13:00 - 14:00
- Type
- Seminar
- Room
- 4.09
- Building
- Langeveld building
If the issuance was successful, the manager received the underwriting fee, otherwise he had to personally purchase the securities. The effect of manager participation can be twofold. On the one hand, it can improve incentives, with managers profiting from success, while losing substantially if an issuance fails. On the other hand, this could lead to opportunistic self-dealing, with managers allocating the best issuances to themselves. The paper exploits an exogenous rule that managers followed when underwriting.
The discontinuities in this rule allow us to identify the impact of additional skin-in-the-game. Moreover, managers had some discretion to deviate. We find that managers were more likely to increase their participation in security issuances that turned out to be more successful, and reduced their take up for riskier issuances. Our findings suggest that manager participation in security issuance can only fix incentives if it is implemented in a strict way.
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