The Impact of Derivatives and CEO Overpower on Bank Risk-Taking Behavior: Evidence from Vietnam

[Purpose] This study investigates the impact of derivative instrument adoption and CEO overpower on bank risk-taking in Vietnam's emerging banking sector. It addresses a critical gap in the literature concerning how these combined factors influence bank risk profiles within the unique context of a developing financial market characterized by a nascent derivatives market and concentrated CEO influence. [Design/methodology/approach] Employing panel data from 38 Vietnamese commercial banks spanning 2009 to 2020, this research utilizes both Fixed Effect Models (FEM) and dynamic system Generalized Method of Moments (GMM) to analyze the nexus between financial derivatives, CEO overpower (proxied by salary, tenure, and ownership), and bank risk (measured by Z-score). [Findings] The empirical results indicate that increased use of derivatives is associated with reduced bank risk. Furthermore, higher CEO salaries and longer CEO tenures are found to discourage bank risk-taking. Conversely, greater CEO ownership correlates with increased bank risk. These core findings demonstrate robustness when tested with alternative risk proxies. [Research limitations/implications] While enhancing understanding of bank risk in an emerging market, this study is subject to data limitations stemming from the relatively small pool of publicly traded banks in Vietnam. This may affect the generalizability of the findings. Future cross-country analyses could address these constraints. Nevertheless, the study extends Corporate Hedging Theory and Agency Theory by providing empirical evidence from an under-researched transitional economy. [Practical Implications] The findings suggest two key policy directions: first, fostering transparent regulation and financial education to enable the effective use of derivatives for risk mitigation in Vietnam; second, implementing strong governance measures, including calibrated ownership thresholds and risk-aligned compensation and tenure practices, to manage the influence of CEO power on bank risk-taking. [Originality/value] This paper offers novel empirical evidence on the synergistic effects of derivatives and CEO overpower on bank risk within an emerging market. It contributes to decision sciences by providing nuanced insights into the complex decision-making processes, governance structures, and risk management practices pertinent to the banking industry in such economies, particularly where derivative markets are still developing.