The Stock Market and Bank Risk-Taking
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.
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Copy CitationAntonio Falato and David Scharfstein, "The Stock Market and Bank Risk-Taking," NBER Working Paper 22689 (2016), https://doi.org/10.3386/w22689.Download Citation
Published Versions
ANTONIO FALATO & DAVID SCHARFSTEIN, 2025. "The Stock Market and Bank Risk‐Taking," The Journal of Finance, vol 80(6), pages 3223-3261.
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