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Size, leverage, and risk-taking of financial institutions

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  • Bhagat, Sanjai
  • Bolton, Brian
  • Lu, Jun
Abstract
We investigate the link between firm size and risk-taking among financial institutions during the period of 2002 to 2012 and find size is positively correlated with risk-taking measures. Second, a decomposition of the primary risk measure, the Z-score, reveals that financial firms engage in excessive risk-taking mainly through increased leverage. Third, banks that enjoy better corporate governance engage in less risk-taking. Fourth, investment banks engage in more risk-taking compared to commercial banks. Finally, the positive relation between bank size and risk is present in the pre-crisis period (2002–2006) and the crisis period (2007–2009), but not in the post-crisis period (2010–2012).

Suggested Citation

  • Bhagat, Sanjai & Bolton, Brian & Lu, Jun, 2015. "Size, leverage, and risk-taking of financial institutions," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 520-537.
    • Handle: RePEc:eee:jbfina:v:59:y:2015:i:c:p:520-537
    DOI: 10.1016/j.jbankfin.2015.06.018
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    More about this item

    Keywords

    Financial crises; Bank risk; Bank size; Bank leverage; Corporate governance;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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