Abstract

From the sample of 62 U.S. bank holding companies over the 1987-1995 period, we found that banks with a higher degree of risk diversification significantly increase more risk as managerial stock ownership rises, compared to the banks with a lower degree of risk diversification over the period 1987-1990 when the banking regulations were relatively loose. However, we also found that this increased risk-taking has not ultimately resulted in better performance of the banks. Thus, even though the owner/manager agency problem of banks can easily be addressed by changing their insider holdings or ownership structure, in particular when the banks' asset portfolios are well diversified and banking regulations are loose, this change in ownership structure may have to be associated with closer and more frequent monitoring of the banks' risk-taking behavior, because the increased risk-taking with higher managerial ownership could only end up with increasing the possibility of failure of the bank without contributing to improving bank profitability.