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Managerial Risk-Taking Behavior: A Too-Big-To-Fail Story

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Abstract

We examine the implications of the US government’s too-big-to-fail (TBTF) policy as it has been applied to banks. Using alternative measures of risk, we compare the risk-taking behavior of 11 TBTF banks, identified by the Comptroller of the Currency in 1984, to a number of non-TBTF banks. We provide both theory and new empirical evidence to support our argument that the TBTF policy leads management to significantly increase risk-taking, with no corresponding increase in performance. While prior studies have considered the effects of the TBTF policy on limited, but risk-related aspects of bank behavior, such as the cost of funds, our study provides direct evidence about the risk-taking behavior associated with the TBTF policy. Our study has important implications for the current political debate regarding the too-big-to-fail policy.

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Notes

  1. ROE = (R/E)*(A/A) = (R/A)*(A/E), where R is the returns, E is the equity, and A is the Assets.

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Authors and Affiliations

  1. Texas A&M University, College Station, USA

    Asghar Zardkoohi & Donald Fraser

  2. Nanyang Technology University, Singapore, Singapore

    Eugene Kang

  3. Arizona State University, Tempe, USA

    Albert A. Cannella

Authors
  1. Asghar Zardkoohi
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  2. Eugene Kang
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  3. Donald Fraser
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  4. Albert A. Cannella
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Correspondence to Asghar Zardkoohi.

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Zardkoohi, A., Kang, E., Fraser, D. et al. Managerial Risk-Taking Behavior: A Too-Big-To-Fail Story. J Bus Ethics 149, 221–233 (2018). https://doi.org/10.1007/s10551-016-3133-7

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