Bank CEO Materialism, Corporate Culture, and Risk

Robert M Bushman
Kenan-Flagler Business School, University of North Carolina-Chapel Hill

Robert H Davidson
McCombs School of Business, The University of Texas at Austin

Aiyesha Dey
United States Securities and Exchange Commission
Carlson School of Management, University of Minnesota

Abbie J Smith
The University of Chicago Booth School of Business

September 2015

Abstract

We posit that relative to more frugal CEOs, materialistic CEOs, as evidenced by the ownership of luxury goods, will exhibit greater proclivity for promoting aggressive risk-taking cultures. We document that the proportion of banks run by materialistic CEOs increased significantly from 1994 to 2004, coincident with significant bank deregulation. Using an index reflecting the strength of risk management functions (RMI), we find that RMI is significantly lower for banks with materialistic CEOs, significantly increases after a frugal CEO replaces a materialistic CEO, and decreases after a materialistic CEO succeeds a frugal one. We also find that banks with materialistic CEOs have significantly more downside tail risk relative to banks with frugal CEOs, where the difference between groups increased significantly during the recent crisis. Finally, we provide evidence consistent with non-CEO executives in banks with materialistic CEOs more aggressively exploiting inside trading opportunities around government intervention during the financial crisis relative to executives at banks with frugal CEOs.

JEL Classification Codes: G30; G34; G38

We would like to thank Andrew Ellul and Vijay Yerramilli for sharing their RMI data with us. We thank Hamid Mehran, Thomas Ruchti, Chris Williams, and Donny Zhao for insightful comments.

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