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The Stock Market and Bank Risk-Taking

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  • Antonio Falato
  • David Scharfstein

Abstract

We present evidence that pressure to maximize short-term stock prices and earnings leads banks to increase risk. We start by showing that banks increase risk when they transition from private to public ownership through a public listing or an acquisition. The increase in risk is greater than for a control group of banks that intended but failed to transition from private to public ownership, a result that is robust to using a plausibly exogenous instrument for failed transitions. The increase in risk is also greater than for a control group of banks that were acquired but did not change their listing status. We establish that pressure to maximize short-term stock prices helps to explain these findings by showing that the increase in risk is larger for newly public banks that are more focused on short-term stock prices and performance.

Suggested Citation

  • Antonio Falato & David Scharfstein, 2016. "The Stock Market and Bank Risk-Taking," NBER Working Papers 22689, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:22689
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    Cited by:

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    2. Laura Blattner & Luisa Farinha & Francisca Rebelo, 2017. "When Losses Turn Into Loans: The Cost of Undercapitalized Banks," 2017 Papers pbl215, Job Market Papers.
    3. Allen, Franklin & Jagtiani, Julapa & Goldstein, Itay, 2018. "The Interplay between Financial Regulations, Resilience, and Growth," CEPR Discussion Papers 12861, C.E.P.R. Discussion Papers.
    4. Kurtzman, Robert & Luck, Stephan & Zimmermann, Tom, 2022. "Did QE lead banks to relax their lending standards? Evidence from the Federal Reserve’s LSAPs," Journal of Banking & Finance, Elsevier, vol. 138(C).
    5. Garel, Alexandre & Martín-Flores, José M. & Petit-Romec, Arthur, 2020. "Stock market listing and the persistence of bank performance across crises," Journal of Banking & Finance, Elsevier, vol. 118(C).
    6. Yang, Ling, 2016. "Is Bank Supervision Effective? Evidence from the Allowance for Loan and Lease Losses," MPRA Paper 75761, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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