Manager wealth concentration, ownership structure, and risk in commercial banks

Of key importance in the governance structure of firms is the role of financial incentives for each major player. The main contribution of this article is an analysis of how an insider's concentration of wealth in his or her bank investment affects incentives to take risk. Major empirical findings are that, first, bank earnings variation falls when bank managers have more of their wealth concentrated in their banks; second, hired-manager banks become less risky when a person who has significant motivation to monitor bank management has his or her wealth highly concentrated in the bank; and third, stock ownership by hired managers can increase total risk of a bank. Further analysis suggests that community banks in our sample control earnings variation by manipulating idiosyncratic risk, credit risk, and leverage but not systematic risk or the loan-to-asset ratio. (C) 2007 Elsevier Inc. All rights reserved.