Does Corporate Culture Affect Bank Risk-Taking? Evidence from Loan-Level Data

Duc Duy Nguyen; Linh Nguyen; Vathunyoo Sila

doi:10.1111/1467-8551.12300

Does Corporate Culture Affect Bank Risk-Taking? Evidence from Loan-Level Data

Duc Duy Nguyen, Linh Nguyen, Vathunyoo Sila

King's Business School

Research output: Contribution to journal › Article › peer-review

61 Citations (Scopus)

266 Downloads (Pure)

Abstract

Using comprehensive corporate and retail loan data, we show that the corporate culture of banks explains their risk-taking behaviour. Banks whose corporate culture leans towards aggressive competition are associated with riskier lending practices: higher approval rate, lower borrower quality, and fewer covenant requirements. Consequently, these banks incur larger loan losses and make greater contributions to systemic risk. The opposite behaviour is observed among banks whose culture emphasises control and safety. Our findings cannot be explained by heterogeneity in a bank’s business model, CEO compensation incentives, and CEO characteristics. We use an exogenous shock to the US banking system during the 1998 Russian default crisis to support a causal inference.

Original language	English
Pages (from-to)	106-133
Number of pages	28
Journal	British Journal of Management
Volume	30
Issue number	1
Early online date	30 Jan 2019
DOIs	https://doi.org/10.1111/1467-8551.12300
Publication status	Published - Jan 2019

Keywords

Corporate culture
Bank risk-taking
Bank loans
FINANCIAL CRISIS
Financial stability

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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10.1111/1467-8551.12300

Does Corporate Culture Affect_NGUYEN_Published Online 30 January 2019 GREEN AAMAccepted author manuscript, 1.19 MB

Cite this

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abstract = "Using comprehensive corporate and retail loan data, we show that the corporate culture of banks explains their risk-taking behaviour. Banks whose corporate culture leans towards aggressive competition are associated with riskier lending practices: higher approval rate, lower borrower quality, and fewer covenant requirements. Consequently, these banks incur larger loan losses and make greater contributions to systemic risk. The opposite behaviour is observed among banks whose culture emphasises control and safety. Our findings cannot be explained by heterogeneity in a bank{\textquoteright}s business model, CEO compensation incentives, and CEO characteristics. We use an exogenous shock to the US banking system during the 1998 Russian default crisis to support a causal inference.",

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Does Corporate Culture Affect Bank Risk-Taking? Evidence from Loan-Level Data

Abstract

Keywords

UN SDGs

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