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CEO overconfidence and bank systemic risk: Evidence from U.S. bank holding companies

Liu, Liang; Le, Hang; Thompson, Stephen

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Authors

Liang Liu

HANG LE HANG.LE@NOTTINGHAM.AC.UK
Associate Professor

Stephen Thompson



Abstract

Following the 2007–2008 financial crisis, the attention of financial regulators and academics has shifted from bank individual risk to bank systemic risk, that is, banks' exposure to future systemic crises. In this paper, we examine whether CEO overconfidence could explain cross-sectional heterogeneity in the systemic risk of U.S. bank holding companies. Using measures of overconfidence based on CEOs' options exercise behaviour and language used in the Managerial Discussion and Analysis of the 10K-filings, we find that banks with overconfident CEOs have higher systemic risk than their counterparts with non-overconfident CEOs. Banks with overconfident CEOs also have higher holding of private mortgage-backed securities and higher leverage. During the 2007–2008 financial crisis, banks with overconfident CEOs experienced higher realized systemic risk. Our work shows that the behaviour of overconfident bank CEOs could impose negative externalities beyond individual bank boundary.

Citation

Liu, L., Le, H., & Thompson, S. (2022). CEO overconfidence and bank systemic risk: Evidence from U.S. bank holding companies. International Journal of Finance and Economics, 27(3), 2977-2996. https://doi.org/10.1002/ijfe.2308

Journal Article Type Article
Acceptance Date Sep 24, 2020
Online Publication Date Oct 13, 2020
Publication Date 2022-07
Deposit Date Nov 5, 2020
Publicly Available Date Nov 12, 2020
Journal International Journal of Finance & Economics
Print ISSN 1076-9307
Electronic ISSN 1099-1158
Publisher Wiley
Peer Reviewed Peer Reviewed
Volume 27
Issue 3
Pages 2977-2996
DOI https://doi.org/10.1002/ijfe.2308
Keywords Economics and Econometrics; Accounting; Finance
Public URL https://nottingham-repository.worktribe.com/output/5018976
Publisher URL https://onlinelibrary.wiley.com/doi/full/10.1002/ijfe.2308

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