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Growth Opportunities and Risk‐Taking by Financial Intermediaries
Author(s) -
HERRING RICHARD J.,
VANKUDRE PRASHANT
Publication year - 1987
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1987.tb04570.x
Subject(s) - financial intermediary , intermediary , financial distress , business , finance , cash flow , financial risk , investment (military) , financial system , economics , monetary economics , actuarial science , politics , political science , law
We show that growth opportunities which cannot be converted to cash under conditions of financial distress ( G z ) are a critical determinant of an intermediary's choice of risk. Financial institutions in whichG zis a low proportion of total assets will be much more likely to engage in go‐for‐broke behavior. The model leads to a reevaluation of the effectiveness of several traditional remedies for dealing with banks that take excessive risks such as raising insurance premiums, intervening before capital is depleted, and restricting investment options. The model also has implications about a new approach to the examination of financial intermediaries.