Managerial Overconfidence and Bank Risk Taking: A Cross-Country Analysis

This paper examines the effects of managerial overconfidence on bank risk taking and investigates whether improvements in governance can help to mitigate the adverse effects of managerial overconfidence on bank risk taking by using ordinary least squares method. The sample consists of the financial institutions in G20 and Taiwan over the period of 2005-2012. The executive overconfidence is measured by press data. The risks are defined as credit risk and insolvency risk. Controlling a number of corporate governance variables, bank-specific variables and country-specific variables, this paper finds that overconfident CEOs or CFOs tend to take more credit risk and insolvency risk, especially in the recession periods, but they would lower their risk exposure in the boom and profit periods. Banks can mitigate the negative impacts of managerial overconfidence by expanding the size of the board and preventing a manager from being also a board chairman. Supervisory authorities can reduce bank risks by strengthening official supervisory power.