The influence of the CEO tenure and Board co-option on the level of risk taking of banks

Abstract

The CEO, as top-decision maker of the company, may to a great extent determine the risk attitude of the company. The riskiness of the CEO’s decisions may have a large influence on the companies performance and the stakeholders’ appreciation. Ultimately, the riskiness of the CEO’s decision may even lead to bankruptcy. This thesis focuses on the influence a CEO can have on the level of risk taking of banks by analyzing the variables CEO tenure and Board co-option. There is no objective data directly representing the CEO power, but on basis of agency theory, stakeholder theory, and stewardship theory three hypotheses are formed on how the CEO tenure and board co-option ratio are influencing both the CEO power and the CEO’s willingness to take risks. The more power the CEO has, the more influence he can have in the amount of risk the bank takes. To test these hypotheses, the predictions were compared to a dataset consisting of data for 1060 banks from all over the world in the period 2000-2019. Small correlations were found, suggesting that both a higher CEO tenure and a higher Board co-option ratio come with an increase in the risk taking of the bank, which is not in accordance with the hypotheses and the agency theory. Furthermore, the interaction term of the CEO tenure and Board co-option ratio is positive whereas the individual trends are negative. This indicates that the common part of the CEO tenure and Board co-option ratio behaves differently than the non-overlapping part. This result is unexpected and is not in accordance with the hypothesis. However, all the observed correlations were either not statistically significant or very small and as such little support for the proposed models was found in the data. This indicates that the idea that the riskiness of the CEO’s decisions is driven by the CEO tenure and Board co-option has marginal predictive power and that other factors influencing the riskiness are dominant.