Managerial risk-taking behavior : a too-big-to-fail story

• Main Authors: Zardkoohi, Asghar, Kang, Eugene Soon Lee, Fraser, Donald, Cannella, Albert A.
• Other Authors: Nanyang Business School
• Format: Article
• Language: English
• Published: 2020
• Subjects: Business::Law; Too-big-to-fail; Moral Hazard
• Online Access: https://hdl.handle.net/10356/139526
• Institution: Nanyang Technological University

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.