Bankers' skin-in-the-game and bank risk-taking - with Peter Koudijs
This paper studies whether executives’ skin-in-the-game improves bank risk management. We use a unique historical setting from one of the largest Dutch banks in the early 20th century. Apart from a share in total profits, executives had additional skin-in-the-game by partially guaranteeing their banks’ security issuances. If the issuance was successful, executives received the underwriting fee, otherwise they had to personally purchase securities. We exploit exogenous discontinuities in the rule pinning down the size of this guarantee. We find that issuance quality was higher when executives had more skin-in-the game. Subscription rates were higher, while issuing firms had stronger balance sheets. Results indicate that skin-in-the-game directly tied to executives' decision making can help reduce risk-taking.