CEF.UP – FIN Seminar

Thursday – December 12^th, 2024 at 13:00h (1:00 p.m.) | Room 305

Matching for Risk-Taking: Overconfident Bankers and Government-Protected Banks

Andreas Haufler – Ludwig-Maximilians University – Munich (Germany)

Abstract:

“We set up a simple theoretical model in which banks with varying degrees of government support are matched with CEOs that have different degrees of over-
confidence. The channel through which the matching occurs is the share of bonus payments offered by the bank in its profit-maximizing contract. This yields a sequence of hypotheses: banks with more government support incentivize their CEOs more and this disproportionately attracts overconfident CEOs. In equilibrium this in turn leads to an assortative matching between overconfident managers and banks with a larger bailout probability. We then test the hypotheses derived from this model empirically. Our regression results confirm the hypotheses from our theoretical model for normal years, but not during crises and periods of enhanced regulation. In these times, overconfident CEOs do not behave differently from non-overconfident CEOs.”