Holding Bankers Liable: Personal Guarantees and Risk-taking in Security Underwriting - with Peter Koudijs
Does additional liability for bank executives improve risk management? We address this question using uniquely detailed data on the underwriting activities of one of the largest Dutch banks in the early 20th century. Its executives faced additional liability as they partially guaranteed their banks’ security underwriting. If the issuance was successful, they received the underwriting fee; if it failed, they had to personally purchase securities at a loss. Exploiting exogenous discontinuities in the size of these guarantees, we find that issuance quality was higher for bigger guarantees. Investor subscription rates were higher and issuing firms had stronger balance sheets. Results indicate that additional liability directly tied to executives' decisions can help reduce bank risk-taking.