Working Paper: NBER ID: w22689
Authors: Antonio Falato; David Scharfstein
Abstract: We present evidence that pressure to maximize short-term stock prices and earnings leads banks to increase risk. We start by showing that banks increase risk when they transition from private to public ownership through a public listing or an acquisition. The increase in risk is greater than for a control group of banks that intended but failed to transition from private to public ownership, a result that is robust to using a plausibly exogenous instrument for failed transitions. The increase in risk is also greater than for a control group of banks that were acquired but did not change their listing status. We establish that pressure to maximize short-term stock prices helps to explain these findings by showing that the increase in risk is larger for newly public banks that are more focused on short-term stock prices and performance.
Keywords: Banking; Risk-taking; Public ownership; Short-termism
JEL Codes: G01; G2; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Transition to public ownership (P31) | Increase in bank risk-taking (G21) |
| Transition to public ownership (P31) | Decline in supervisory ratings (J26) |
| Transition to public ownership (P31) | Shift towards riskier activities (G40) |
| Focus on short-term stock prices (G14) | Larger increase in risk (I12) |
| Transition to public ownership (P31) | Deterioration in CAMELS ratings (G28) |
| Transition to public ownership (P31) | Greater reliance on short-term funding (F65) |
| Institutional ownership (G32) | More pronounced risk-taking behavior (D91) |