The Stock Market and Bank Risk-Taking

By: David S. Scharfstein and Antonio Falato

Format:Print
| Language:English
| Pages:63

Abstract

Using confidential supervisory risk ratings, we document that banks increase risk after they go public compared to a control group of banks that filed to go public but withdrew their filings for plausibly exogenous reasons. The increase in risk increases short-term performance at the expense of long-term performance. The increase in risk stems from increased pressure to maximize short-term stock prices and earnings once the bank is publicly-traded. After going public, banks that are owned by investors that place greater value on short-term performance increase risk more, and those managed by CEOs with more short-term compensation also increase risk more.