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Does Corporate Culture Affect Bank Risk‐Taking? Evidence from Loan‐Level Data
Author(s) -
Nguyen Duc Duy,
Nguyen Linh,
Sila Vathunyoo
Publication year - 2019
Publication title -
british journal of management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.407
H-Index - 108
eISSN - 1467-8551
pISSN - 1045-3172
DOI - 10.1111/1467-8551.12300
Subject(s) - loan , business , competition (biology) , incentive , shock (circulatory) , affect (linguistics) , organizational culture , covenant , quality (philosophy) , monetary economics , financial system , accounting , economics , finance , microeconomics , medicine , ecology , linguistics , philosophy , theology , management , epistemology , biology
Using comprehensive corporate and retail loan data, we show that the corporate culture of banks explains their risk‐taking behaviour. Banks whose corporate culture leans towards aggressive competition are associated with riskier lending practices: higher approval rate, lower borrower quality, and fewer covenant requirements. Consequently, these banks incur larger loan losses and make greater contributions to systemic risk. The opposite behaviour is observed among banks whose culture emphasizes control and safety. Our findings cannot be explained by heterogeneity in a bank's business model, CEO compensation incentives or CEO characteristics. We use an exogenous shock to the US banking system during the 1998 Russian default crisis to support a causal inference.