Corporate control, bank risk taking, and the health of the banking industry

We present evidence that managerial shareholdings are an important determinant of bank risk-taking. Managerial shareholdings are positively related to total and firm specific risk in the late 1980s when banking was relatively less regulated and when the industry was under considerable financial stress. However, following legislation in 1989 and 1991 designed to reduce risk-taking and also reflecting substantial improvements in bank franchise value, managerial shareholdings and total and firm specific risk became negatively related in the early 1990s. In contrast, systematic risk was unrelated to managerial ownership in both periods. (C) 2000 Elsevier Science B.V. All rights reserved.